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

All right. Great. Good afternoon, everyone. Thank you for joining us for Baird's 2022 Sustainability Conference. Our next presentation this afternoon is from Henry Schein. With us from Henry Schein, we're very happy to have outgoing Chief Financial Officer, Steve Paladino; incoming Chief Financial Officer, Ron South. We also have Graham Stanley, VP of Investor Relations; and Jennifer Kim Field, Schein's Vice President of Corporate Social Responsibility. So Graham, I think I'm going to turn it over to you. You're going to say a few words, and then we'll get on with the presentation. So good afternoon, guys. Thanks for joining us.

All right. Thanks, Jeff, and thanks, Baird, for hosting this conference today. Before we begin, I'd just like to start off by saying certain comments made during this call will include information that's forward-looking. And as you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward-looking statements. 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, including in the Risk Factors section of those filings. And with that, I'll hand it over to Steve Paladino, who'll also like to give a bit of an introduction to Henry Schein and our business. Steven?

Great. Thank you, Graham. Thank you, Jeff, and thank you to Baird also. I'll just quickly go through a quick high level of who Henry Schein is. We are the largest distributor of products and services to dentists and physician offices as well as other sites. Last year, 2021, we did sales of over $12 billion. Our sales are about 60% dental, 34% medical, the balance of about 5% for technology and value-added services. We have operations of affiliates in 32 countries. We serve more than 1 million customers, and we have more than 21,000 Team Schein Members. I'd also like to point out that we're very proud of the number of the awards that are shown on this slide. You could see that the first item, Fortune's Most Admired Companies, we've been on that list for the last 21 years. We're also, for the last 10 years, on -- at Ethisphere's Most Ethical Companies. We're a member of the S&P 500 Index. We're on the Forbes Best Employers List in the last 5 years as well as Best Places to Work for the last 7 years. So that's just a quick snapshot of Henry Schein. We've been involved in the ESG activities for many years even before it was called ESG. It was really something that Mr. Henry Schein, the founder of the company, believed very deeply in and that legacy has been carried on through the years. So with that, I'll turn it over to Jennifer Kim Field. Jennifer is, as Jeff said, our VP of Corporate Social Responsibility, who really runs all of our ESG activities along with other team members. So Jennifer, to you.

Thanks, Steven. And thanks to all of you as well who are listening, and thank you, Jeff, for hosting us. So over the past several years, there's been an increasing feeling among many that the business of businesses is no longer only business. So our customers, suppliers, investors and our team increasingly look to our company and indeed all businesses to find new ways to create shared value for society as well as for the company. And as Steve just mentioned, this has long been part of the DNA of our company, and we continue to innovate and evolve in the ways that leverage our core capabilities. So while ESG has become more in the limelight in recent years, as Steve said, it's not new to us. So more than 3 decades ago, we adopted our stakeholder engagement concept of Henry Schein's Mosaic of Success, which you see here, which formalize the company's commitments to balancing the needs of our 5 key stakeholders. So first, our Team Schein Members, our employees; second, our customers; third, our suppliers; our shareholders; and society. And as we focus a large part of our discussion today on our priorities, achievements and goals in these areas of ESG, the Mosaic of Success really is a foundation for our sustainability efforts. So I want to go through then this time line to talk about the deep rich history. This time line illustrates the work that we started many years ago, and it only highlights just a sampling of our corporate citizenship and ESG journey over the past 30 years. And when Henry and Esther Schein founded the company in 1932, they firmly believed that the sense of purpose and commitment to our values is a key driver of the company's success. And of course, this has been a long, complex journey. But when we reflect on our evolving efforts in this area, I'd say that there are 3 chapters of this journey. The first chapter, not surprisingly, as you see on the left-hand part of the slide, started with our Mosaic of Success. And over that decade, we focused on developing initiatives that engage the health care professions and our employees. Particularly for the health care professions, this included our founding of OSAP, which stands for the Organization for Safety, Asepsis and Prevention, and they established infection control standards at the height of the AIDS crisis; the Santa Fe Group to bring together medical and dental health care leaders to promote oral health and overall health; and then our partnership with the American Dental Association Diversity in Leadership Institute to promote and support diversity in dental profession. These programs really were precursors to many other partnerships with the dental and medical professions in decades to come. And at that time, we understood the importance of engaging our Team Schein Members and their effort to give back to the communities in which we operate to really formalize what Henry and Esther Schein had already been doing nearly 90 years ago. So Back to School and Holiday Cheer are signature programs and they serve more than 1,200 children annually. In 2001, we formalized our global CSR program, Henry Schein Cares, to put a clear strategy behind our work. It was through this second chapter of 2001 to 2010, when we continued to establish a number of key flagship initiatives to advance health equity and sustainability. I'll highlight 2 of them. There's the Give Kids A Smile program, which is a partnership with the American Dental Association. And this program has served, since its inception, more than 7 million children with free oral health services provided by thousands of dentists and tens of thousands of dental team members volunteers annually. And then our Global Reflections program, which is a green program for health care professionals to encourage environmentally sustainable practices in office locations. During the third chapter, so this is the right-hand side of the slides, of 2001 through today, the landscape of sophistication around how to most effectively do well by doing good has continued to evolve further still and with it our strategy. This past decade, I'd say, is one of our more exciting ones where we've seen our vision and commitment as a purpose-driven company continue to deliver more tangible environmental and social impact. And in 2015, as we all know, the development of the United Nations Sustainable Development Goals, being the world's blueprint to achieve a better and more sustainable future for all, is a time for all sectors to really take action. This period starts with our co-founding of the Center for Higher Ambition Leadership, a community of leaders committed to building high-performing organizations that deliver superior economic and social value. We also catalyzed a myriad of impactful multi-stakeholder partnerships, as you see, with the World Economic Forum and the United Nations and many others. But most notably, we founded in 2015 the Pandemic Supply Chain Network together with the World Health Organization, World Economic Forum, World Bank and more than 60 companies to strengthen the resilience of the global health supply chain in response to pandemics, which is especially relevant today given the COVID-19 pandemic. And we've continued to accelerate our diversity and inclusion efforts, which we can discuss in more detail later in partnership with Jeff. But over the past few years, we formed several employee resource groups, or ERGs, including the Women's Leadership Network; our PRIDE & ALLIES for our LGBTQ+ community; Black Legacy Professionals, COLEGAS, which is our Hispanic and Latinx community; and our pan-Asian and veterans ERGs. So with this deep rich history as backdrop and context, you might ask the -- I'll turn to you the so what question. What are we doing now and for future years to come? So I won't spend too much time on this slide because I want to allow enough time for our Q&A following this and any questions that you might have in the audience as well, but I will say this. In line with our 3-year corporate strategic plan of 2022 to 2024, we have integrated corporate citizenship in our ESG work so that it is a part of how we do business. Any work under the E, S and G areas, as you may know, is a marathon and not a sprint with multifaceted approaches and strategies while keeping an eye towards policy and regulatory changes. So whether it's related to gender pay equity and leadership representation to recruitment and hiring or carbon neutrality, culture and climate change, these are examples that don't happen overnight. However, we all have a role to play, collectively, in moving the needle in all of these areas. And for us at Henry Schein, this includes things like, under the E, reducing our carbon footprint to work towards carbon neutrality by 2050 and to continue our waste management and recycling efforts. Under the S, the broadest category, we enhanced our commitment to advance health equity to continue our progress in supply chain resiliency and focus on our most valuable asset, our Team Schein Members and looking out for their health, safety and well-being. And of course, we can't do the E and S without the G, good governance to bring oversight and add accountability to the work we do and to ensure high ethical standards to our business continues to be at the heart of our efforts. We have a Sustainability Committee and Diversity and Inclusion Council with Board oversight, and we will strengthen this through additional climate governance measures and ESG data assurance over the coming years. And so Jeff, I'll close by saying we're excited by the progress we've made so far with our initial goals and targets we announced last year on recycling, waste management, diversity inclusion and health equity. And later this spring, we'll showcase our progress against those goals in our upcoming sustainability report later this spring. But we know there's still so much more that we can do and look forward to sharing more of our plans in our report. So with that, I'll turn it over to you, Jeff.

Thank you, Jennifer. That was a helpful overview. Very nicely done. I appreciate that. I do have a few questions here I thought I'd start with. One, I was going to go off script and ask you maybe about the menagerie behind you, but maybe we'll try to stick to the script instead. But I like the visual there. That is for sure. So on one of your slides there, Jennifer, you had the Harvard Business School case, Henry Schein Doing Well by Doing Good. And that's been a mantra, I think, for Schein for many years, for decades, in fact. How has the discussion of the ESG impacted Schein? And what's different in recent years?

Sure. So just to reiterate, Henry Schein is a purpose-driven company, focused on Doing Well by Doing Good. The values and the sense of purpose that we have behind our efforts to creating this shared value has not changed. I think what has really progressed the past few years is the shift to the concept of stakeholder capitalism that by serving the interest of all stakeholders, not just shareholders, is key to the long-term business success -- or long-term success of a business. And I think that, alongside more formal efforts around metrics, goals and targets of ESG reporting, has sort of come at a tipping point. But I think that the key trends that set the context for this evolution over the past couple of years also include some of the following. One, the growing recognition that the next few years really are the world's last chance to save the planet from the most extreme scenarios of climate change. I don't know where people are in the world today. But the extreme weather shifts that you're seeing from -- on a 24-hour basis, I think, is an example of that. Also, the demographics of our corporate stakeholders, which include our employees, customers and investors is rapidly shifting, both with respect to age as well as diversity. And the way that they would like to engage with the company on these matters has changed as well. And of course, the most obvious, the COVID-19 pandemic, the worst health crisis the world has seen in a century, which has changed the world's thinking about everything, from supply chain to access to care to racial equity. And then with the pandemic and over the last 2 years, I think we've seen significant fluctuations in the economy and the great resignation trend, which has been eye-opening for many organizations. So what this has meant for us is one, adhering to our belief in core team values that are expressed by our strong team culture, one that is diverse and inclusive, open to team feedback and focused on our team's wellness and development, which will help us to continue to attract and retain the world's best talent as well as better support for our customers. And this has also strengthened our long-standing commitment to the environment, supply chain resiliency and access to good quality health care for underserved communities who are disproportionately disadvantaged for multiple reasons, including the ability to pay, race, religion and social status.

Yes. No, that's helpful. And you mentioned supply chain resiliency there. But across the globe, businesses today are managing supply chain risks that have evolved as a result of the pandemic. So Henry Schein has a broad and complex supply chain. What efforts have you undertaken to foster kind of that resilient ethical supply chain? And maybe touch on human rights and labor protection in that as well, if you could.

Sure. It's a good question. And I think the pandemic has clearly demonstrated the health care supply chain is designed for maximum efficiency, but maybe not optimal to deal with crises. And so for more than a decade, Henry Schein has been a global leader in catalyzing efforts to help build a more resilient, transparent ethical health care supply chain and strengthen pandemic preparedness and response. We've carefully built our credibility and fostered key relationships as a long-standing thought leader and advocate in this area. This includes what I mentioned before in the presentation that was notable, the Pandemic Supply Chain Network, where we thought about this over 7 years ago. We're active participation as a member of the U.S. Health and Human Services Supply Chain Task Force Steering Committee, other related FEMA initiatives, a participant in the U.S. government supply chain control tower and a partner of the U.S. Strategic National Stockpile. And so it's through these and other initiatives that we're working to do a couple of things. One is build a platform to enable the sharing of critical data across public and private sectors. And secondly, catalyze collaborative action across the health care value chain to incorporate the related climate, human rights and equity concerns within the health care supply chain. So given that, we want to uphold the highest human rights standards in all areas of our business, and we've been doing it quite well, we believe. But with the pandemic, obviously, it's definitely had shined a light on this. And so with respect to our own Team Schein Members as well as our commitment, we want to ensure to identify, prevent, mitigate and remedy any adverse human rights impacts across our company's value chains and our supplier partners. And so with respect to strengthening the geographic diversity of our supply chain, we have long-standing strategic partnerships with our global transport partners that share our values and work with our diverse set of suppliers to mitigate sourcing risk. We do trainings with our employees as well as it relates to human rights, particularly in our security area. And then we're in the process of establishing additional initiatives that will enable us to deploy even more robust and sophisticated supply chain mapping of our nearly 4,000 supplier partners to proactively identify any potential risk so that we can quickly address and mitigate.

That's great. That's helpful. Good. Maybe some insights on Henry Schein's environmental and climate approach in your operations and your supply chain. So on environment and climate, what has Henry Schein been doing from an operations and supply chain standpoint?

Sure. So environmental sustainability has been a core pillar of our global CSR program, as I've described for you. We do have 5 pillars to our approach and environmental sustainability being one of those. And so our roots in being an environmental steward, coupled with the global momentum and urgency behind the climate crisis, is what brings us to our environmental approach today. And so I look at our work in 4 ways, some of which were in the presentation, as you saw from that last slide, but we'll go deeper here. The first is around goal setting and mitigation for carbon emissions. So through our business ambition for 1.5-degree commitment, we're working towards setting a science-based target to achieve net zero global emissions by 2050, if not earlier. So what this means for us is finalizing our global baseline data now for Scope 1, 2 and 3 in hopes to have some targets and goals by the end of next year. And I think setting this goal is important to play our part in a collective effort to decrease global warming because we know a healthy planet means healthy people who can thrive and reach their potential. The second way is the circular economy. How can we best use our supply chain competencies to reduce, reuse and recycle to minimize waste and work with all our key stakeholders, particularly our suppliers and our customers. Next, we made a commitment last year that we'd be disclosing more climate risks and opportunities. And I'm pleased to say we'll be issuing our initial Task Force for Climate-Related Financial Disclosures, or TCFD for short, report alongside our annual sustainability report this spring. And we plan on conducting a scenario analysis later this year to better understand how climate change will affect our business over the next 3 decades and what might we need to change in how we do business to accommodate and mitigate these risks. And then lastly, there's leadership. What role can the health care industry play on environmental and climate efforts? Because given if the health care industry were a sector, were a country, it would be the fifth largest emitter of greenhouse gas emissions. And so through our work with the National Academy of Medicine's decarbonization of health care collaborative as well as the FDI World Dental Federation Sustainability Task Force, we're working collectively with industry partners to address the climate crisis.

Okay. Well, great. That's a lot of S in the ESG there, so a lot of sustainability. But maybe one last question or maybe 2 questions, I guess. But what advancements outside of the S part of ESG have you made to improve diversity, equity and inclusion? And kind of what are the plans going forward for Henry Schein on that front?

It's a good question. S, for anyone, is a really big bucket, but it's also an important bucket and one that, for those who know Henry Schein, we've been doing quite well and have been recognized for, as Steve mentioned. Our employees, our Team Schein Members, are our greatest assets, as I mentioned. And to that end, we have a holistic approach to our diversity and inclusion that encompasses 4 pieces of the framework: talent, culture, marketplace and society. And we're so pleased to announce that this year, we added a diversity inclusion-related value to our overall Team Schein values, and it's a critical part of our team culture. And the value reads: diversity and authenticity are embraced to create a sense of belonging for all. And this has been really well received by our [ team ]. And so I think that's one example of -- we talk about the evolution and what has been happening and progressing over the past couple of decades. And I think this is one where we've had our Team Schein values for quite some time, and to be able to add a new value to that, I think, is quite important for us. Gender and pay equity are equally as important a focus for us. Our goal is to increase the representation of women and other underrepresented groups in senior operating roles and to promote an environment where all Team Schein Members can thrive and feel included. We're also in the process of refreshing our pay equity analysis across the U.S., which will review pay across gender and ethnic groups. And we look forward to sharing some of our learnings in our upcoming sustainability report. And then we did announce last year our first D&I goal around education for our global directors and VPs. And I'm proud to say we were successful in achieving that goal. And we went beyond just a number of TSMs involved in this because we also want to have a meaningful engagement with the team. It's not just about the education but what is that next step in engaging. So there have been live sessions with questions and answers that have had an important impact on the organization. And this education will continue for all global directors and vice presidents this year. We'll also be educating all global managers and all U.S.-based Team Schein Members on the foundational concepts of diversity inclusion. So we still continue on our journey, but pleased to say that we continue to move the needle as it relates to DEI.

Great. Well, thank you for that. Just as a reminder, I should have said it at the beginning, if anyone does have a question from the audience, you can feel free to e-mail me directly at [email protected]. I'd be happy to ask them a question or any of the questions you send in. So really, the last one I have, and I don't know, for Ron or for Steve, just on the costs associated with ESG, anything in the near to intermediate term where there could be an inflection in cost? I know you guys have been doing this for so long. I'm assuming a lot of this is probably just kind of in the run rate of numbers. But how should investors think? Very good things coming out of it, but anything going into it from a cost standpoint we should be aware of?

Sure. Ron, do you want to take that? Do you want me to take it?

You can start and I'll chime in, if you wish.

Sure. So I think as you said earlier, Jeff, we've been doing this a while, so investors should not expect any unusual incremental costs because we've already had those costs laid into the company at this point. Of course, there will be some additional ones as we do more activities, but nothing significant that would be important to point out to investors. Again, it's part of our DNA, it's part of our culture. So it's already embedded in the company's financial information.

Yes. And I would just say, too, that you had -- while there may be some -- as Steve said, some incremental costs, we don't see it as being, by any means, significant. We think there's -- it's difficult to measure, but there's long-term return on this, right? There's an opportunity. Jen kind of touched on a healthier environment, a healthier population of people is good. It keeps the employees, the TSMs, healthier. These are all benefits that come from these types of ESG initiatives. So I think it's money well invested, quite frankly.

Yes, I think that makes sense. All right. Well, great. Let me see. I still don't see any questions from the audience, and that's kind of it. I've gone through my list. So Jennifer, Steve, Ron, Graham, everyone, thanks for joining us today. It is very much appreciated and enjoyed the presentation. And hopefully, we will follow up soon. So take care, and have a great day.

Thank you, Jeff.

Thanks, guys.