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

Great. Thanks. Good afternoon. Jon Block with Stifel. I'm very pleased to have with us Henry Schein joining us this afternoon. And from Henry Schein, we have Stanley Bergman, Chairman and CEO; and Steven Paladino, Executive Vice President and CFO. A lot to talk about as always, with Henry Schein, and we'll get into a bunch of different topics. First, I'm going to hand it over to Steven, who I think is going to kick us off with some safe harbor agreements, and then we'll get into the Q&A track.

Okay. Thank you, Jon. As we begin, I'd like to note that certain comments made during this call may include information that is forward-looking. As people know, the risks and uncertainties involved in the company's business may affect the matters referred to in these forward-looking statements. As a result, the company's performance may differ from those expressed in or indicated by those forward-looking statements. And all of these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's SEC filings. So with that, I'll turn it over to Stanley.

Thank you, Steve. Thank you, Jon, for inviting us once again to your conference. And thank you for the detailed research you do on our sector. It's very, very helpful. So I will not go into huge detail, allowing more time for Q&A, but I think your viewers probably know that Henry Schein is the largest provider of products and related services to office-based health care practitioners, and that we have a global marketplace that we service. And basically, in most countries around the world, dentistry is back to 2019 activity. It's not perfect there, not in every respects, but the levels are really getting close to that. The last ADA survey, it was 87%. We probably jumped further than that in the U.S. That's not quite 100%, but it's almost there. In the U.S. on the Medical side, more or less physician visits are coming back to where they were in 2019. Still a little bit to go on the ambulatory surgical center side. Our consumable sales on the dental side, doing quite well we noted that in our last call, in the U.S. and Canada, Australia, New Zealand, Brazil, Asia and most of Europe, particularly strong in France, the Netherlands, Belgium, Italy and to a lesser extent, in Germany, although it's coming back. And the U.K. had some challenges, but it's also coming back. Since our call, we were awarded the Strategic National Stockpile contract for PP&E and storage -- PP&E storage and distribution, about a $53 million contract. That's the floor. And hopefully, we'll be able to generate a bit more revenue as we advance that contract. We've been quite active in promoting participation by physicians and dentists in the COVID-19 vaccinations, activities, having written a letter to the U.S. House Select Committee on the coronavirus crisis. I believe there's a greater understanding today within the government, within Congress on the importance that office-based practitioners can play in the inoculation of COVID-19. We continue to make good progress with, of course, our core business, not only that it's consumables, equipment, pharmaceuticals, not only in sales but of also increasing effectiveness, efficiency of our supply chain, our infrastructure, adding value-added services as well as our e-commerce. At the same time, our high-margin software and specialty businesses, all progressing nicely. And we continue to have a very good balance sheet, good access to liquidity. We're buying back stock. We are making acquisitions. So we believe that 2021 will continue to be a year of getting us back to where we were in 2019 and perhaps even ahead of that. So we remain quite optimistic about the future. Jon, with that in mind, I think it's best to answer specific questions if you may have for all that.

That's great. That's great. Thanks, Stanley, for that and helpful introduction. I'll stick with you, Stanley. I mean you mentioned the ADA numbers and they continue to move a little bit higher. We've seen that, to your point, to the high 80s. Maybe just talk about it, if you think that is -- there's always been some debate there indicative of overall patient flow. And maybe behind the numbers, there's that chatter that it's moving from the restorative, which was dominant once the pandemic began to ease more to a hygiene type of scenario? Do you agree with that? And what that does or doesn't mean for Henry Schein?

Yes. Look, it's -- these numbers, Jon, are not scientific. But as I indicated, we're getting close to the 2019 data visits, data on visits. And it's not perfect. The data is not perfect, but we're getting much closer. I would say there's still quite a bit of restorative activity going on. I don't think we've gone back. But hygiene is coming back. Although you have to remember, hygiene visits are not the highest dollar per visit activity, but it's coming back. So I would imagine within 5, 6 months, we'll be back to pretty much normal across the board. But the dollars are being spent clearly still on restoratives, for specialty areas. And yes, and people are not scared to go to the dentist anymore.

Yes. Yes. And Stanley, you said that interesting comment of maybe within 5, 6 months, we're back to -- as we ease back to normal. So does that mean we should still expect that delta between, call it, patient volume in revenue to persist, right where revenue has been much higher than patient volume. That should still remain intact and maybe that stays in place for the next handful of months before it reverts back to that tighter band between revenue and volumes.

It's hard to be precise, Jon. Of course, we are in the middle of the quarter, but we did say on our investor call that April was a good month across the board. And I think I can't predict the future. I can't give you specifics on sales. But it would be hard-pressed to see a reversal here.

Got it. Okay. Steven, I'm going to shift over to you and ask about margins. And maybe we can talk to the components that snap back in 1Q '21 versus 2020. And if you can sort of detail as best as possible what part of that improvement was the underlying business versus PPE?

Yes. It was more related to the underlying business rather than PPE. But there were a few components that helped us in Q1. Not in any particular order. We had higher supplier rebates than in 2020. We talked about that on our conference call. We had lower inventory adjustments on PPE. And both of those helped the gross margin percentage. On the expense side, I would say that expenses still remain low because we still haven't -- we're still not spending all of the expenses, like travel and other items, that we were pre-COVID. We're also continuing to make investments in technology. We talked about the e-commerce project that we're investing in. We talked about our Ascend software. That's a cloud-based system that we're making investments in. So overall, we feel like -- there's one other point that really helps us. If you look at our equipment sales for the quarter, they were very strong. And equipment, because there's a significantly greater percentage of fixed cost and equipment, helps margin. And the 2 big fixed costs that we have are equipment centers, where we have the same number of equipment centers, whether we sell a lot or little of the equipment during the quarter; and also service technicians. The service technicians don't fluctuate, so they're more efficient the greater the sales are. And those 2 things helped our margins also. We haven't given guidance for margin for the balance of the year. Although we did say longer term, we feel once the margins settle in, we still see margin expansion opportunity on a longer-term basis. But we want to wait until we're back in a normal environment before we give specific guidance on margin expansion.

Okay. And maybe just a follow-up and let me be more specific, I guess. Like you said, there's still going to be T&E that hopefully comes back into the equation as the world continues to reopen in the back part of '21. But if I were to isolate the gross margin, Steven, what would take us back in the other direction? I mean I know you alluded to some of the volume benefits that you may have just had in 1Q. But is that 1Q '21 sort of reflective of what you think we might see on a more sustainable basis? .

Yes. And we indicated that on the Q1 conference call that we don't see any. And we said it in the reverse, Jon, we said, we don't have any unusual onetime benefits in gross margin in Q1. So we think that, that's relatively stable going forward. The variability will be a little bit on the operating expenses and the operating margin.

Okay. So GM is reflective. And then to your point, more the variability would exist within, call it, the OpEx leverage so to say.

Exactly.

Okay. Stanley, to move over to you. The Dental Specialty business, you've always talked about this business and highlighted it. It's one of the many things that makes Henry Schein very unique, having that big Dental Specialty business. But you've given more details around it. I think in the most recent quarter, you talked around $222 million in revenue. It's run rating at close to $1 billion business. Maybe give us some more color there. I mean I know the biggest is implant and then endo and ortho. But is there a way to roughly break down the percentage of each? And just how do you see this business going forward?

Yes, Jon. Firstly, we're very enthused about this business, most enthused actually for a while. And I don't think at this stage, we've actually given the mathematical breakdown, but the implant business and the bone regeneration business, all part of our global oral surgery group, have done quite well for a long time. We have a premium brand that -- 2 actually, Camlog and BioHorizons, that are every bit as good as the leading brands. They even have, in some respects, maybe better innovation, and they sell at a lower price. And then we have discount brands as well. The leading one is mega dental in -- sorry, Medentis in Germany, and that's done very well as well. So on the implants, we have a very good comprehensive offering at the top; and at the discounting side, all at good pricing. And we carry the complete range of bone regeneration products: the bovine, the synthetic and the human. And at the same time, we have a very good endo business with a good premium brand. We offer a good discount brand, the generic version of key brands in the marketplace. And the orthodontic business, we have a very good line of traditional orthodontics that have done pretty well. And we introduced our own aligner a year or so ago. And I would say, all of these businesses are doing okay now and gaining market share, and they do well in conjunction with our other value-added services, such as our Henry Schein One offering.

Okay. And when we get back to that -- more of that normal environment, Stanley, whatever that is, we should think about what because of the opportunities in these businesses, clear aligners being really incremental, that your specialty dental business should outgrow that of underlying consumables. Is that a fair assumption to make longer term?

Well, it is our hope and our strategy to continue to grow our specialty businesses at a multiple of the growth rate in our core businesses. Remember, these businesses have a terrific operating margin, so we're hopeful that they will continue to grow at a much better rate. That's the strategy. And we have shown that we can do that now for several years.

And Steve, Stanley just took a little bit -- stole my thunder where I wanted to go with this, which is help us with at even a high level the margin structure, right? I think I always like to say for a distributor, it's just -- there's so much emphasis on margin expansion. You've got this massive revenue base, $10 billion plus. The ability to expand margins, you just see it exponentially impact the bottom line. So when we think about that basic dental consumable margin and how that compares and contrast versus that specialty, can you give us some goalposts to think about to apply to those 2 businesses?

Sure. We haven't given specifics, but I'll give you some color. On the Dental Specialties, and the largest of the specialties is dental implants. It probably represents close to 2/3 of Dental Specialty revenues. We have said that our margins are comparable to the other implant companies that are out there. So you can get an idea from that. So it is significantly higher margin than the core dental distribution business, which is also a good margin. It's just these are a little bit higher or a bit higher. We feel that, that shift towards higher-margin products will help the overall margin, specialties being one of those. Another one of those is growing the technology business at faster rates. And we more recently talked about this One Schein concept, which is getting existing customers to buy more technology and specialty products more as a one-stop shop than buying separately from different people.