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

Hi, good afternoon, and thanks for being here for the second Wolfe health care conference and what we hope will be the only Wolfe virtual health care conference. First and last, maybe I'll call it. It's a pleasure to wrap up here, wrap up today with Stan Bergman and Steve Paladino from Henry Schein, a couple of folks we've known for a while. The dental presence, dental turnout at the conference has been great, and I can't think of a better way to wrap things up. Guys, thanks for being here. And Carolynne, who I know is listening in, thanks for being here as well. I think before we get into the Q&A, we're going to kick it over to Steve and then over to Stan as we start up here.

Okay. Thank you very much, Steve, and thanks for hosting us. I just wanted to note that certain comments made during this call may include information that is forward-looking. And as people know, the risks and uncertainties involved in the company's business may affect those matters referred to in forward-looking statements. As a result, the company's performance may differ from those expressed and/or indicated by these forward-looking statements. And all of these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission. So with that, to open, I'll turn it over to Stan, who will give some opening remarks.

Thank you, Steve -- Steves, multiple -- plural. Thank you, Steve, 1 for hosting. Thank you, Steve, for handing over, and good to see everyone today. I can't see you, but I heard that there's a lot of people in the audience. So I'll just give a very brief overview of Henry Schein, and Steve, if it's okay with you, leave most of the time for answering specific questions. So Henry Schein is the largest provider of products and related services to office-based dentists and medical practitioners. In terms of products, the widest variety. Services, we are a significant provider of practice management software, electronic medical records, various kinds of intraoperable connections from devices to the electronic medical record. Various kinds of transactions from claims processing, credit card processing and various financial services and other similar services that revolve around helping practitioners operate a more efficient practice so that practitioners can focus on the delivery of clinical care. The dental business has been a stable grower now for many, many years. There's a growing understanding of the direct correlation between good health care and good oral care, many studies coming out. Our physician business is -- has enjoyed historically good growth. As procedures move out of the hospital into the alternate care site, be it the physician office or the ASC, the ambulatory surgical center, the urgicenters are growing, facilities that provide renal dialysis, cancer centers, communities, health care centers, these are all areas we focus on and generally are good markets. We have a distribution business in dental and medical, servicing the complete variety of consumables, equipment, pharmaceuticals, whatever a practitioner may need really for the practice. We have -- and that's dental and medical. We also have our software business as described, Henry Schein One on the dental side. We also offer some software on the medical side. But Henry Schein One is a significant provider of dental software in most of the developed world. And then we also have our specialty businesses. The area we're particularly strong in is implants, bone regeneration products. We are global, but our strength in particular in that area is in Germany, Austria, Germanic countries and also in the U.S. and Canada. But we also have businesses throughout the world, in Japan and some Asian countries, China. And then we also have a pretty active business in the endodontics field and the different brands. I think we are one of the biggest players in that space. And then we have -- it's rather small at this time, orthodontic -- the previous one was endodontics. Now orthodontics business in traditional orthodontics but also a growing business in the aligner field, relatively new. And that offering is only sold through orthodontists and physicians and dentists. GPs as well, they can also use our aligner system. It's quite easy to use. On COVID, we ramped down significantly in April, first week of April, in response in the United States to the ADA suggestion that dentists only service, take care of emergency treatment. There were similar kinds of requirements or suggestions, recommendations on the medical side. So we powered down the business in the United States, and -- in early April and started bringing it back in the middle of May towards the end of May. It was a very steep down and a very, very steep up. Our focus, of course, was our team, helping our customers get through this and preserving our balance sheet, where we furloughed a lot of the team during this period. Of course, we did ensure that the team got health care insurance and the like. But we did all we can to reduce our expenditures, both P&L and -- we stopped acquisitions. We stopped stock buyback. We stopped -- and we stopped investing in new equipment. To a certain extent, it was similar in Europe. In Canada and in Asia, varying degrees depending on the support governments were offering. And the business came back much faster than we thought in June, July. In the United States, the ADA estimates that about somewhere in the last few weeks have been -- the statistics have been going between 75% and 80% of patients returning. Most practices are up. And the tendency is for larger ticket billings in dentistry right now. We can talk about that if you have any questions on that, Steve. And the medical business has more or less returned to where it was. Asia is back to pretty much where it was before. COVID actually [ was ] much better in China, for example, and our business there is small. And Europe is somewhere in between Asia and the U.S. The U.K. is in not a good shape, hasn't really come back, so there's a particular reason why we can talk about it. And the -- in Germany and, I would say, Austria and the Netherlands, more or less not quite where it was before but almost there. And Italy and Spain, a little bit worse than that. France is pretty good. Steve, I can give you more information, but that's essentially high, high level of who we are, the kinds of products and services we sell and a very, very thumbnail sketch of the virus.

Thank you. Stan, you covered a lot of ground there. I have quite a few questions I want to get through. I'll try to make the most of our last session here at the day. [Operator Instructions] What I wanted to start with was something of a current events point, I guess. And it's the announcement that Henry Schein has decided to enter into a combination with TDSC. We've been following TDSC for a few years. They certainly managed to grow pretty rapidly. And it was a nice message that they had, right? It was by dentists, for dentists. They had some logistical capability. I wonder if you could help us understand, in the combination with TDSC, what does this do for Henry Schein? And how does this impact the way that your customers with a full-service offering think about working with Henry Schein?

So Steve, I'm glad you asked that question because, actually, I think there's a lot of misunderstanding. So TDSC only does business digitally through its website, a pretty good website. So many have said, well, you did that deal because you were concerned about giants that are coming into the electronic space, into the e-commerce space, and this was defensive. That's not the case. What happened is the history of TDSC is a simple one. 5 or 6 years ago, a number of dentists in California went to the Executive Director of the Dental Association and said, look, these big DSOs are getting deals, and yes, they do get deals -- but not because the cost to service them is less. We don't assign salespeople. There's no marketing cost. And essentially, they buy large amounts [ with certainty ], and we help them, and they allow us to negotiate with manufacturers on their behalf, and they get good deals. That was not available to the small practitioners. So the small practitioners went there to the California Dental Association and said set up a business to compete. We entered into discussions at the time with the California Dental Association. Let's set up a buying group. We're very comfortable setting up buying groups. We have them in medical. We've had them in dental for years. And the answer was, no, we're going to do it on our own. So a couple of years ago, we had another meeting with the California Dental Association people and said we can do everything you're doing. But they'd have to [ do fulfillment for the orders and let us ] manage the products, the offering. And again, I think they want to do it on their own. And then in the middle of COVID, they called up and said this is too much. This is a complex business. Why don't you buy it from us? Why don't we enter into a partnership? If it's a partnership, they have equity in it. And we're happy to do that. It sits side-by-side with the Henry Schein business. Our salespeople get commission on sales that go through this. This business, it's a select offering of branded product, some private brand but doesn't include the equipment and the software. But if somebody wants all of that that's a member of the TDSC group, then we'll offer that with pleasure but through our traditional sales force. And the TDSC is not limited only to California. They have arrangements with a number of other dental societies around the country, and we're happy to work on this. Buying through TDSC or buying through Henry Schein, slightly different offerings, but both provide good value.

Okay. Does this signal anything about a potential for capital deployment to try to scale up with acquisitions of other dealers, be they traditional or e-commerce? How do you think about cap deployment between scale versus more as a private label or adding as you have in specialty categories?

So it's also a good question, Steve. Bottom line is we abruptly stopped our acquisition plans in first week of April to preserve cash. We had a very strong pipeline. In our call a few weeks ago, we confirmed that we still have a pretty good pipeline. It's actually quite strong. The areas of interest, of course, are traditional distribution companies that are tuck-in acquisitions. In other words, they have a book of business, maybe they have some salespeople, maybe they have a presence in a market, and we fold it in. Or maybe it's in a new market that we're not in, very often, we enter into a joint venture, a new geography outside the geographies we're in. And yes, we're interested in investing in it. And that's both dental and medical. At the same time, we are very interested in adding to the Henry Schein One platform. And we'll make acquisitions to provide additional services for software and other value-added services, anything to help the practitioner operate a more efficient business so that they can provide better clinical care. And in the other area, the third area is to advance our position in the specialty fields, where we make a lot of the products ourselves. It's really the only place where we make products, in the specialty fields. And we are interested in expanding our presence in the specialty markets, adding new intellectual property to this platform, and we will invest in that area as well. So that's more or less the philosophy. We have very tight criteria for making an acquisition. It has to fit in strategically. And then Steven has very tight metrics that the team has to comply with.

When would be the right time to think about restarting the share repurchase plan?

Steven?

Yes. Steve, we don't have a specific time period. But when we -- back in -- I guess it was March and April when we expanded our credit facilities. One of the things that we agreed to as part of that was to hold off on stock repurchases for a short time. And so what we agreed to is not to do any stock repurchases until after we release Q2 '21 earnings. Right now, given how our cash flow has rebounded so strongly, I think if we wanted to get an amendment to that, we probably would. But I think we really don't need to get an amendment because we'd still like to make sure the visibility is strong. So the short answer is it won't be until at least second half of 2021.

Okay. Before we start talking about operating environment and product categories, I wanted to ask one sort of big industry structure question, and it's about consolidation. DSOs, a very important customer category for you. For DSOs, as for anybody, difficult to execute in this operating environment aside from, let's say sticking to our knitting. Beyond COVID, in a post-2020 or post-vaccine environment though, wouldn't you expect there to be an acceleration in consolidation around the space? It's a question that gets asked a lot, and I think it's always kind of, hey, let's wait and see. But this week, we saw a pretty significant milestone with 2 fairly large DSOs actually combining with each other. How does that impact your thinking on consolidation in the space?

Yes. Steve, I think the pre-COVID trends will continue. It's not a rapid movement towards large DSOs. There is a tilt. The key is there's no shortage of capital, and there's no shortage of locations to open. But of course, DSOs need to obtain enough dentists on their payroll to make it worthwhile. That's a bit of a challenge for some, not for all, but I think it's leaning. Where we also see acceleration is in the mid practices, the practices of, I don't know, 10 or so operatories to 100. There has been quite a bit of action because I think those practices lean towards the practitioner being a partner. Obviously, the bigger it is, the more fixed cost can be amortized. But at the same time, practitioners are looking to own an interest in the practice. So that's been growing. I do not believe that -- I believe that COVID did not necessarily drive consolidation faster, but economics will. And I think there will be likely further acquisition of practices -- of DSOs by other DSOs. But I don't see the medical model folding there quickly. And the medical arena was driven very -- for different economic circumstances. First, the IDNs were created. Second, you needed volume to negotiate with insurance companies. It's not quite the same in dentistry. It's not possible to operate in a small practice efficiently. I don't think the 1 or 2 or 3 practice will be there for much longer, past retirement of people in the market today. But I think the midsize practice will grow. And certainly, the DSOs will grow but, I think, also through acquisition of each other.

Okay. I would agree. I want to talk a little bit about the operating environment. If I think back to the 3Q call, there was a perspective that there might have been a little bit of pent-up demand that supported 3Q. And so we took a view that 4Q growth may not be as robust as 3Q, a little bit of conservatism which, in this environment, is certainly understandable. And then just earlier this week, we saw the ADA come out talking about how they were seeing a little bit of incremental softness in the market. I'd say at the same time just in full disclosure that in listening to our mutual friends at Envista and Dentsply Sirona here just in the last couple of days, they have been quite a bit more optimistic. So I'd say it's an open question about how things are evolving even with COVID cases growing rather quickly. How do you guys think about it? How do you try to piece it together?

Well, I've been speaking a lot, and Steven should speak as well to this. But I think that, essentially, dentistry is a service that the public want. I think people continue to go to the dentist. I have one big footnote, and that is if there's government intervention like there was in April or the ADA comes out or any processional association comes out and says close your practice except for urgent emergencies, that changes the landscape. I doubt that is going to happen. We're pretty close to the leadership in dentistry. I doubt that they will do that again. But bar that, I don't see anything shaking the foundation of going to the dentist. Obviously, if you're in a state where 25% of tests are positive, it's going to give people second thoughts. But I don't think that kind of statistic is going to go on for years. In maybe a couple of quarters. But Steven, thoughts?

Yes. We did guide to a little bit of sales moderation post Q3 on our Q3 conference call. By the way, Steve, it wasn't just related to Q4. It could extend a little bit beyond that. And there's a few reasons why we did that. One was because the COVID cases are increasing. In Europe, there's lockdowns in many countries. The lockdowns do not close dental offices. But the lockdowns restrict the general public from certain activities, and that may cause a lower patient traffic volume in some countries. We also see the ADA noting that patient traffic has slowed slightly most recently. And a couple of other things that we were thinking about. One was, was there a little bit of pent-up demand in dental procedures, especially towards higher acuity type procedures that generally carry a higher volume of supplies -- consumable supplies, so that could moderate a little bit. And maybe the last thing I'll mention is on PPE products. Pricing was very high as products were in short supply, and the pricing has come down pretty significantly. So just on a sales dollars perspective, that would have sales moderate. Necessarily -- won't necessarily have an impact on profitability but certainly on the top line. So for all of those reasons, we said let's be a little cautious. No one has a perfect crystal ball these days, and let's guide a little bit to a little bit more moderation of sales growth. The good news, though -- sorry to be so long winded. But the good news is none of our projections back in March, April, May time frame had us anywhere near the level of patient traffic and market rebound as we currently are. So we are way ahead of all of our projections. The markets have rebounded very nicely. There are a few exceptions here and there. The U.K. is soft right now. But generally speaking, we're very pleased with where the market is. And we expect it to continue to come back. We're still not at pre-COVID levels of patient traffic, but it's just -- we expect it to continue to improve more longer term.

Got it. Have things improved much, Steve or Stan, in terms of the supply around PPE? And while we're asking about supply, what about testing? I know that's been an area of interest. But it's -- the demand is so intense. Has the supply situation there improved?

So on PP&E (sic) [ PPE ], I would say, across the board, there's more or less enough product for our customers. There is a shortage in nitrile gloves, so we're on rationing with that. Our manufacturers are providing us with product and maybe extra products from last year quite a bit, but it's stable. There is a run, of course, on some of this because not all suppliers the dentists and physicians were buying nitrile gloves [ from that product ]. But we have a program that for our own customers that traditionally buy these products from us, we're servicing them; newer customers, maybe, depending on the availability. But generally, there is enough product. There's also a problem with wipes, not the wipes that you get at the supermarket but the medical wipes. We get them. In fact, we get -- selling a lot more than in previous years. But there are alternatives that you can find, other kinds of less convenient ways of sterilizing. As it relates to tests, Steve, we've had a [ division ] within Schein focused on point-of-care tests, rapid tests for about 40 years. COVID tests, we started with the antibody, doesn't seem that that's the right tests. The public health people are not sure what it means if you have antibodies or you don't. But we have the PCR test. We have the antigen test. We have them from the larger platforms that manufacturers have and have them as add-ons, and we have them all the way to stand-alone. There is a shortage of new devices. They come and they go. And there is also a shortage of the reagents or the cartridge depending on the system. And it seems like the government purchase orders absorb products from time to time. And we're hopeful that we will get more product because it's our view that the place where these need to be is in the urgicenters, in the physician offices, in the ambulatory surgical centers before people go through a procedure. You don't need to send something to lab and get results 2 or 3 days later. I actually had a [ panendoscopy ] -- it's normal standard procedure -- the other day. And my -- I went to the ASC and did the test there and got results in 20 minutes. That's the way it should be. And I think we're moving towards that. It's a question of availability. And I'm quite sure that these tests will be needed for a long time going forward. There are all sorts of new tests. The -- we have a saliva test we offer. But those are not immediate, rapid point-of-care, get an answer in a couple of days. So I think this market is growing fast in terms of new players. I believe that availability will increase, should increase. And clearly, the place to do a lot of this stuff is the physician office, surgery center, urgicenter, places that we service.

Okay. So we're on the right track here.

I think so. We just -- at some point, the government's going to have bought enough, I hope.

I'm not going to make any comment on that point, but I understand where you're coming from.