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

All right. Great. Okay. Well, good afternoon, everyone. Welcome to the continuation of day 1 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the health care services analyst here at Barclays. Our next session will be with Henry Schein. With us from the company, we have Stanley Bergman, the Chairman and CEO; Steve Paladino, the CFO; also, Carolynne Borders from Investor Relations. I always try to say the number of years that we've had the same C-suite of this company. I'm always off -- I always understate it by a few years. We're probably well past 25 at this point, but it could go something way beyond that. So I'm not going to try to guess that number anymore, but I suppose you guys probably know the whole management team pretty well. This will be a fireside chat. But before we do that, I think I'm going to flip it over to Steve Paladino where he'll go through a couple of slides, and then we'll dive into some questions.

Sure. Stanley, did you want to make any opening remarks?

Please, Steven, go ahead, and then we can answer questions, please.

Okay. All right. Thank you, everyone. So if we flip to the second slide, that's really our slide on safe harbor. And obviously, this fireside chat may include forward-looking statements, and those forward-looking statements are protected by our SEC filings. If you flip to the next slide. I just want to point out some quick summary of some key highlights from Q4. So first, we really feel that the market is continuing to improve. That drove record net sales growth in the second half of 2020 for us. And specifically, when you look at the dental end market, the ADA survey, American Dental Association, is now citing that patient traffic is at 82% of pre-COVID levels. That's up from a few weeks ago when it was 80% and up from few weeks prior to that point when it was in the high 70s. So it's continuing to progress and improve nicely. And how our insurance claims that we have to our technology business in the U.S. also are improving and corroborating with the ADA is showing. That led to global dental consumable sales growth of 10%, and excluding PPE and COVID-related products, up 5% for Q4. We are showing sales growth with and without PPE, but it's important to note that PPE sales, we do expect to stay at elevated levels and practices to continue to follow sterilization, masking up, gloves, et cetera. So you shouldn't look at that as a nonrecurring sale in our [ kit ]. North American consumables in Q4 was up 5.3%; PE, up 0.4%. International had a very strong quarter, up 16%, 16.7% and excluding PPE, up 11.4%. Looking at dental equipment, we did note on our conference call that our backlog of equipment orders increased from the beginning of the quarter to the end of the quarter, so that's a good indicator going forward. North America dental equipment sales for Q4 were down 13%. But there was a number of factors driving that, including a difficult prior year comparison, the Dentsply Sirona World event being a virtual event this year. We had another supplier that exited certain equipment lines, and there wasn't the availability that quickly for other manufacturers to step up, the suppliers. And also, we think tax incentives worked against us in Q4. Now that's only a timing difference. But we think for 2 reasons that dentists may have not bought as heavily in Q4 as typical. One, their earnings, their income for 2020 is probably down because of COVID. And two, with the new administration, many people were expecting, or are expecting a tax increase in 2021. So having a tax deduction in 2021 is worth more than 2020. We did not have those issues internationally, and you could see without those issues international, a very strong equipment growth of 6.8%. Turning to Medical. Medical really had an unbelievably strong quarter with total sales up 48%, and ex PPE, up 3.6%. So we're continuing to see strong growth in our Medical business. And finally, Technology and Value-Added Services was relatively flat, down 0.7%, primarily because many of the revenues that, that group has related to patient traffic, and the patient traffic is still at the 80%-or-so level that impacts sales growth. But we did note that our Dentrix Ascend business, which is a SaaS cloud-based practice management system, was doing very well as well as certain financial services. If you flip to the next slide, I'll quickly go through this, and then we'll -- I'll hand it back over to Stanley. So one, I did comment on PPE and COVID-related sales. Again, we think that will remain at elevated levels. Generally speaking, there will be some pluses and minuses, but generally, we think that standard of care will continue in dental and medical practices where people will be using gloves, masks, sanitizing products consistently what we've seen in recent history. We also wanted to note that in 2021, we did have an impact to our margins. There were 2 significant impacts impacting our gross margin. One is inventory adjustments related to PPE products. And the second is lower supplier rebates in 2020 because of COVID. We also noted that on the expense side, we're now completely separated operationally from Covetrus. That happened in Q4. So they're now completely, again, separated and standing on their own 2 feet. But that left us with $10 million to $12 million of stranded cost for 2021. And we also noted on our Q4 conference call that we're investing in some IT projects. The big one is the global e-commerce platform that Stanley talked about on the call. Clearly, as the markets continue to improve, that will be good for our sales and earnings growth, which will also correspondingly increase. We also stated that, longer term, we expect to expand operating margins, in part with bigger contributions from higher-margin product lines like the technology business at Henry Schein One, dental specialty solutions as well as certain corporate brands. And then finally, on guidance. We didn't give traditional guidance, which is typically a range between X and Y. Leading up to the call, we were getting a fair amount of questions from both sell side and buy side on how do we really model you in 2021. We don't have enough visibility to model. And because of that, we said, "Look, we feel like we should do something." And what we did was we issued a floor of $3.51 for 2021 guidance. And it's important to note, it's a floor. It's not intended to be a single point guidance of $3.51. We think we'll do better than that $3.51. But at this point, we haven't really quantified what that will be. But hopefully, as the year progresses, we'll be able to give a little bit more detail on guidance going forward. So with that, I'll turn the call back over to Stanley, and then we'll take questions.

Thank you, Steven. I'll limit my remarks so that we can have time for Q&A. Essentially, Henry Schein is the largest provider of products and related services to office-based practitioners. That's dentists, physicians, including alternate care sites such as ambulatory surgical centers, urgicenters, renal centers, cancer centers and community centers. Our businesses are all on solid footing. 2020 was a highly, of course, unusual year. And we can analyze 2020 further, Steve, if you would like more questions answered on that. But essentially, I think we need to take a look at where we were at the end of 2021 and project forward from there. And essentially, we are committed to growing our footprint in our 2 distribution businesses, our global dental distribution business. We want to, of course, get greater market share, as we have for years, in the markets we're in, additional markets, expansion of products and continue to grow, as I said, our position with office-based health care petitioners and the like in dental and medical. We want to continue to advance our value-added service businesses, which the anchor, of course, the center of that is Henry Schein One, the largest provider of practice management software, electronic medical records and other kinds of software to office-based dentists. We are committed to advancing our specialty businesses, our implant business and bone regeneration business focused on oral surgeons, our endodontic business and our orthodontic business, which has a traditional component or traditional ortho wires and brackets components and our aligner business, which we launched a year or so ago. So the goal is to continue to do that and continue with our track record. This year is our 25th year as a public company. You look back, you'll see that our growth for EPS has been about 12%, or actually been 12% compounded annual growth. And our EPS, similar number, and our goal is to continue with that trajectory. Of course, 2020 was an unusual year. But even going -- even taking that into account, we expect to continue into the future, and our plans are to continue to provide consistent growth, generate cash, which we used for 2 purposes, to buy back shares, and we announced our yesterday that we are -- Monday, that we are commencing, starting to purchase stock again. Stock, we feel, is at a compressed level. And so we feel it's important for our shareholders to invest in the stock. And at the same time, we will continue to advance acquisitions, which we started -- we had a pipeline, strong pipeline going into COVID, and we put that on hold, and we started with acquisitions again in the fourth quarter, having completed 9 acquisitions and put in just about $200 million of capital to work in the fourth quarter. And now we'll continue to do that in the first and beyond that -- first quarter and beyond. So with that, Steve, we are ready to answer any questions you may have.

All right. Great. Yes, that slide was certainly helpful. It showed some of the parameters around the 4Q results. And with that guidance kind of being a floor, it's hard to say that, ex assumption of COVID vaccinations, translates into the guidance. But maybe you can talk a little bit -- since your business truly is global, we've seen COVID cases coming down in Europe as well, but then they -- last week, they went back up for the first time in a while, but maybe just talk about your latest thoughts, though, on the fact that cases have come down so much and what that means just globally across your overall business and for whatever was sort of put into that floor of the EPS guidance, if you're feeling maybe a little bit better about the overall outlook relative to the decline in COVID cases?

Yes, this is Mike. So I think between the time of our investor call and now the COVID case confirmations has actually gone in the right direction in most of the countries that we're in. If we can look at where this could be, let us take a look at what's happening in Australia and New Zealand and China. These are markets that are all back to normal. We have a pretty big business in Australia and New Zealand, and the businesses are doing well. Dentistry is back to normal. And people are investing in their practices, dentists, labs, hygienists are back at work. And I would say the same in China. Europe, I think, is moving in the right direction. We didn't experience the downturn as much in the specialty areas, particularly implants in Germany and the region around Germany. The area where we had challenges is the U.K. It's a very odd set of circumstances that deals with reimbursement and the way practices are required to close down. But if you ex that out, Europe is pretty stable. Of course, Italy and Spain really tapered down significantly and then came back to some extent. And France is also quite stable. So Europe is pretty stable. Not back to 2019 numbers, but the level of acuity, again, like in the U.S., has grown in terms of treatment versus the less-expensive treatments or prevention. Our business in Brazil has done very well, although the COVID has had a terrible impact on the Brazilian people. And then if we come to -- and then Canada has, I would say, stabilized quite nicely. Not perfectly back to where it was, but we're experiencing growth. And then if you take a look at the U.S., it is somewhat regional. And apart from the anomaly we had with equipment in the third quarter. It was a particular set of circumstances, and we did indicate that our equipment backlog was pretty strong in the U.S. and outside of the U.S. at the end -- when we had our investor call. If you ex that out, essentially the equipment side, the market has been stabilized. Acuity treatments are ahead of hygiene and prevention-type treatments, although the hygiene and prevention treatments on average are much lower build than the acute -- the specialty and the typical restorative treatment. So in general, I would say, things are stable. And obviously, the more -- the better the results are relative to acuity -- relative to diagnosis, the better. And it's public knowledge that things are better today than they were, as I said, a little bit ago, a month ago or so. So we're optimistic, but we can't tell you for sure where this is heading. If things stabilize, we're pretty optimistic. But if there's a resurgence, it could have an impact. So no resurgence, I think we continue to make improvements. The ADA reported in the low 70s on visits, I don't know, 3, 4, 5 months ago. And they went up to the low -- they went up to the mid- to high 70s. And now they reported 82% recently in the most recent survey, a week or 2 ago. And our data from our insurance claim business supports that. So, overall, we are enthusiastic. Our general plans are in place. And what we just can't say is whether there's going to be another resurgence or not. Absent that, it looks like a pretty good year coming up, [indiscernible].

Okay, great. Now thinking about dental consumables for a moment, obviously, it seems like investors are really trying to separate the PPE from the core dental results. Even if we separate PPE, we'll talk about that maybe in a minute if we have time, but just on core consumable growth and the sales growth really for yourselves and the whole industry is really -- seems to be outpacing the patient volume trends. Steven, you mentioned the ADA survey volume data. So maybe I'm just curious if you can provide more qualitative color on just how much of the consumable sales growth was driven by either greater acuity or just better mix of products and maybe even price so -- to just to maybe better explain why the sales growth is so much stronger than at least these external data points around patient volume trends.

Yes. I would say that in the immediate months after practice has opened related to backlog, I don't think that backlog is so heavy right now. There's -- of course, there is some backlog. And it's mostly related to the fact that more acute procedures are being focused on, including, as I noted, the specialties. And the less expensive procedures, the hygiene and prevention, is not yet where it was or moving -- not even close to where it was at the end of 2019. So I would say that's the reason. I don't think price has been any much inflation in terms of product pricing. Now if you exit -- everything I said is unrelated to PP&E. And PP&E , we can spend hours on that. Suffice it to say that we do believe PP&E will build on the levels of 2019. Units will grow. We expect that to grow. And pricing will not be as high as 2020, but there'll be some pricing increase relative to 2019. We are very careful about passing on all these costs to our customers. We may not keep our margin percentages the same as they were in 2019, but we expect -- this is all to aid our customers through a very challenging time, but we expect the profits from PP&E products to be greater in 2021 to 2019.

Okay. Okay. So I got a few minutes here. I want to make sure we touch on dental equipment as well. Steven, you mentioned the -- some of the tax implications maybe leading to a slightly softer dental equipment sales in the fourth quarter. But I think also on the conference call, you talked about that has translated into pretty strong dental equipment backlog into early '21. Just curious if there's any update on that backlog. Have you been able to capitalize on that? Just any comments you can make around just dental equipment trends as we kind of flip into the new calendar year.

Sure. Well, it's difficult as we're sitting here on March 9 to give an update on this call on that. But we do feel like the tax implications that have equipment delayed out of Q4 and into Q1 and possibly Q2, we do feel optimistic about the recovery and dentists looking to continue to buy equipment to help with efficiencies. Remember, some equipment like CAD/CAM and digital impressioning does save time. And with the new protocols in the dental office, they're not at -- they can't see the same amount of patients in the same time period because of the new protocol. So equipment should really help them in improving efficiency, practice efficiency. So again, we are optimistic about that. We did note on the time of the conference call that the backlog was up from the beginning of the quarter to the end of the quarter. I'd just say backlog is confirmed committed orders by customers, where primarily, at their request, they have asked for the delivery and installation to be sometime in the future. So they may wait for when they're taking a day off to have the installation done or a vacation or slower time of the year. And therefore, we have these committed orders. Generally, we collect deposits on them also, and we're just waiting for the okay from the dental office to do the install, and that's when we recognize that. So we do feel optimistic about equipment going forward.

Okay. You guys increased -- or you announced yesterday that you're resuming the share buyback program. I think you have a $200 million authorization. Just curious around the -- just the timing of that announcement. Obviously, you're feeling pretty good about the business if you're making that announcement. But also maybe just to talk about the balance of capital deployment between buybacks versus M&A because you guys have a pretty good pipeline of tuck-in opportunities, but just curious to hear more about the balance of those 2 uses of capital.

Yes. Well, first on the stock buyback, just to refresh people's memories, when we increased our debt capacity back in the April time period of 2020, we did that, obviously, because we didn't know how long dental practices would be closed. Turned out, we didn't need the additional debt capacity because things improved quicker than we were expecting. But at that time, we agreed with the bank group that we would not, until later this year, buy back stock. Since things have recovered quicker than we expected, we went back to the bank group and said, "We want to stop buying back our stock." And therefore, we got an amendment for that. We put out the press release, and we accelerated that because the stock has been under a little bit of pressure. We felt that's a good buying opportunity right now. And we don't really need to conserve cash like we were thinking back in April. So from a capital deployment point of view, we expect to continue to buy back our stock and use the remaining free cash flow for strategic acquisitions.

Okay, great. Maybe one last final question as we're kind of running out of time here. Maybe we should touch on the medical segment. It seems like everything is going incredibly well within that side of your business right now. And I think what's happening with COVID cases would only help that. The only [ flag there ], I mean would just be -- I think you have a lot of COVID test sales, so I don't know how important that is within the overall revenue and profit stream. You guys did disclose the sales around that the last couple of quarters. But maybe just talk about the puts and takes on the Medical segment around what's happening with the COVID cases coming down?

Yes. We're seeing test, COVID test kits still stay at high levels, although pricing with new products being introduced is lower than what the existing products were. So I would say, even if we had no COVID test kits, Medical had a really strong Q4. But we do expect it to continue for some time now, although at lower selling prices.

Okay. Got it. All right. Well, with that, I think we're out of time. I think we're over by a minute or 2. So I certainly want to thank Stan and Steve for their time today, and enjoy the rest of the conference.

Thank you, Steve.

Thank you, Steve.

All right.