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

Thank you very much.

Hi Stanley, and thanks, everyone, for joining us and Stanley, thanks for joining us remotely. We hope you're feeling well. We're very pleased to welcome Henry Schein, a leading distributor of product technology and services to dental and medical practitioners. Stanley Bergman, as you can see, is joining us virtually today. He's Chairman and CEO. We have Ron South on stage, SVP and CFO.

Stanley, to start, I was thinking maybe keep it kind of open ended and high level. Looking at the dental market, 2022, I think, was a more challenging year for a lot of dental practices. We've heard a variety of reasons for that. Patient traffic was soft, they've dealt with staffing constraints and cost pressures. I guess from your perspective, as we sit here kind of entering 2023, how do you kind of see the state of the market and the kind of key issues that are facing the industry?

Good afternoon or good morning, Nathan. Thank you very much for accommodating me being at home I just returned from Europe. And I started quarantine for a few days, but I'm fine. So overall, I think the market -- it's a good question, by the way, is relatively stable. The demand for dental services remains quite strong. I think there are some challenges. Flu has been quite a challenge across the board in North America and I must say in Europe, other parts of the world. I think the staffing constraints, putting aside the flu issue, are starting to ease up a little bit. But there are still some challenges. The high-value procedures, there a lot of questions on that, is a little bit of trading down, is a little bit of shopping on products. Can you switch from one brand to another, perhaps a lower price. But I would say medium-term -- short- to medium-term, the market is quite solid. Demand for equipment is still there. Digital equipment is a little stronger. And there's a lot of investing taking place in dental offices. Interest rates are a little bit higher than in the past, but much lower than they've been, say, 3 or 4 years ago.

I guess maybe just digging into the numbers a little bit, and Ron if you want to jump in, I guess, in the U.S., last quarter I think your claims data showed patient traffic was modestly down in the quarter. And it was a little bit softer. Your volumes, I think, outperformed that. But I guess, how does that play forward into 2023? Are we at a place where patient traffic is kind of adjusted for the macro reality that we're in? And pending any bigger picture change in the economy, you kind of feel pretty good about where we're at from like a traffic and demand standpoint?

Ron, you want me to take that?

Yes, sure. I'll lead. I think from a patient traffic standpoint, I think we're kind of at a -- it's difficult to compare patient traffic now to patient traffic prior to the pandemic. I think that just -- the protocols in the dental office are a little different. I think the capacity is a little different. So I think we're probably operating what I would consider to be a normal level. We can quibble if that is normal compared to prior to the pandemic, but I think it's really kind of normal operating process right now. Is there opportunity for a little more traffic to come in? Yes, but there's -- that existed prior to the pandemic as well. So I think what becomes more important when monitoring patient traffic is more directionally and sequentially from quarter-to-quarter, from period-to-period, what trends are we seeing. And I think it is fairly stable right now.

Got it. And I think you've talked in the past about employment in the U.S. at least being the biggest driver of dental demand just given how people get their dental coverage. And you can feel like that's the case going forward. And depending on how that plays out in 2023, that will kind of inform which direction the market goes.

Yes, that's right. I think in the U.S., most people get their dental insurance through their employer. Unemployment rates are remaining fairly low. And I think that's a good indicator for us, that people continue to have access to care, which is important for us.

And then I wanted, Stanley, going back to that, you kind of referenced trading down in areas like oral surgery in the third quarter. Have you seen that kind of driven by the consumer of wanting cheaper procedures and figuring out how they might be able to save when they go to the dentist? So like an example could be bridges instead of implants. I don't -- I'd be curious just to get your perspective on, do you see that picking up just given the macro environment that we're in.

I don't think, Nathan, that it's a tsunami. There are bits and pieces here and there where we're seeing trading down. I would say dentists are shopping for price much more in terms of -- you're selling me a particular product today with a particular brand. Is there an option? It's not sort of a wholesale movement towards where can I get my products at a much lower price. There is, I would say, much more informed dental consumer today on the dental side and likewise on the customer side. Some markets is perhaps a little bit more, on the higher end, shopping by the patients. We've seen some of that in Germany, for example. I don't think it's a significant issue in the U.S. But there is, I'd say at the margin, much more awareness of price on the customer side, and it's more to do with value. If I spend a dollar, can I get more value. And there is an awareness on the customer side of seeing whether they can get the service at a lower price. It may be to do with the economy. It's obviously to do also with the Internet today that results in the ability to get more transparency in value.

Makes sense. And I guess on the topic of pricing, I guess, primarily in dental consumables, I know many manufacturers take price increases January 1, certainly not all. Some have kind of changed their cadence and pulled forward some price increases. But I wonder if you could maybe just give us a flavor for what you've seen manufacturers do generally in terms of like level of price increase for '23.

Yes. I mean I can't generalize, not all out yet. But I would say in the earlier part of 2022 manufacturers were increasing prices. I would say it was a unilateral situation. I think there's more -- it's more tempered today. People are thinking, well, if I go too high on this particular product, is there another manufacturer that maybe a second-tier manufacturer that will be prepared to offer the same product at a lower price? So I think these price increases are taking place but nowhere near as one-sided as they were, say, a year ago, that's the new price, take it or leave it. It's much more tepid. And I would say it's closer to the 2% to 3% range than maybe the inflation rate.

Got it. And so it sounds like there is starting to be some resistance to the price increases that manufacturers have took customers and they're looking for alternatives to trade down to?

I think that's a good statement. I think it's correct. There are very few products in dentistry where there's not an alternative, and a high-quality alternative, including our own corporate brand. So I would say customers are looking to make sure that they're getting value. It's just not an automatic reordering of a particular impression material simply because it's a brand. There's checking to make sure that price is in line with what could be potentially bought from other manufacturers of the similar product. I'm giving you an impressionist painting here, I'm not giving you a perfect architectural rendering. Because this is a marketplace where things are playing out. But clearly, manufacturers just can't provide a huge price increase and expected to stick without looking around to ensure what the competitors are offering.

And are there certain categories where you're seeing this more in particular? And I guess, like does that play into some of the owned brands and private label that you have?

Yes. Well, we are, Nathan, a national brand-committed company. So 90% of our products are national brands. Obviously, when you look at pharma, patented products, it's much higher. When you look at generics on the commodity side of products in general, it's much -- the private brand is much greater. But I would say that, in general, there is an opportunity for private brand, but there are also certain manufacturers second tier perhaps even, maybe some bigger brands, that are prepared to be competitive. And so the marketplace is resetting a little bit here. And yes, there's an opportunity for our corporate brand, but there's also opportunity for national brand manufacturers, maybe some smaller ones, even 1 or 2 larger ones, that are looking at price to make sure that they're providing the value that customers must appreciate.

I wanted to ask on Europe, too, because I think the macro dynamics are a little bit different than in the U.S. I guess, how has that translated into the demand environment for dental? And do you feel like Europe, just given the reimbursement structure, the insurance structure that exists in a lot of countries, have less sensitivity to the macro environment than in the U.S.? Or is that too kind of broad based on the statement?

Well, I think in general, you're correct. There's less elasticity related to -- maybe the view of the economy in countries where there is more reimbursement by national -- by governments. In countries where there's not such reimbursement, it's much more elastic relative to the view of the economy. And so there are countries in Europe where it's much better, and there are countries in Europe that are a challenge. I would say it's pretty stable. And there are a few countries where actually things are not bad, like Brazil, for example. And even though I would say, to some extent in Japan, but that's the country also with heavy government reimbursement. But yes, you're correct. The government reimbursement does play a role in cushioning any view -- a negative view on the economy. But I would say again, as we said in the previous call, in our last investor call, things are pretty stable internationally, although I think the U.S. is a little bit hotter, a little bit more buoyant.

Great. And then maybe if we could shift over to dental equipment. Sales have remained very strong for the last several quarters. We kind of talked about some signs of caution in the dental industry, but overall stable demand. I guess -- can you kind of talk to us about why you feel like demand has remained so robust for equipment? And it feels like it's both across the traditional side and the digital equipment side. And so I'd just be curious to get your view on, sort of, the continued, like willingness of dentists to invest in their practices, even given some signs of caution in the broader macro economy.

Well I would say that, to some extent, the consumer is expecting in this post-COVID period, a sterile infection control practice. And to some extent, there's some cosmetics involved. So the practitioners want their practice to look good and modern. I think that's driving a lot of the sales of traditional equipment. Demand has been good. Manufacturers are not 100% fully shipping the orders that are placed, although it is easy. So there is that desire on the traditional side to have a fresh-looking modern practice, and that's causing investment in the traditional equipment. I might add, by the way, that on the traditional equipment, the non-plug and play where it has to be installed, there are still challenges on the construction side in satisfying the dentists' need for speed. So you have -- we're still having practices delayed in terms of construction completion. So that's the traditional equipment. There's the imaging side. It's not a bad market, but pricing is challenged. There's a lot of capacity, and it's a digital product. So as all digital products from the [indiscernible] later on, there's pricing pressure. So I think the unit demand is okay for the imaging 2D/3D, but pricing is a little bit depressed and is a challenge. And then there's the whole -- the digital side, the digital prosthetics side, the scanners, the [ CAD ] side mills, the 3D printing, the equivalent products in the dental labs. These markets are all good. There's a demand for them. There's a movement towards digitalization as it is in every other industry. But pricing is challenged. There are several new players coming into these markets with great products, nontraditional players, and they're competing very well. And some of the larger players have just not been able to match price and features of some of these new entrants, because we carry all of these products. And would also be -- price is being [ prudent ] on us to add more of these new alliances as well.

And I guess, can you give us a sense of the magnitude of ASP declines that we've seen in imaging and the digital equipment categories that you referenced over the last several quarters.

I can't say, I have a number, but that's more Ron's department. But I'm not sure if that's such an easy number to give you.

Yes. It isn't that completely easy to provide. I think probably the best example would be on some of the intraoral scanners. That was kind of the standard price on an intraoral scanner, historically has been in that $20,000 to $25,000 range. And you're seeing entrants to the market now that are as low as $12,000. So it's like any other technology, as it becomes more readily available for manufacturers and they find a more efficient way to make it, they're willing to come out with a lower price. And so as we see some of these -- and Stanley referred to them, some -- kind of new suppliers who are entering the market with this, it's increasing demand for the product because it's a more attractive price point. But it is -- as the total revenue being generated tends to be relatively flat, but we do see increased volumes like sales of scanners and things like that.

And from your standpoint, I guess, when it comes to sort of the ASP that you recognized, is that being driven by more dental practices are choosing these like lower price point scanners? Because it sounds like the capabilities between what you used to get with the top brands and what you get with some of the lower-priced brands, those capabilities maybe have -- that gap has narrowed.

Yes, yes. I think that's probably a fair statement. I think that's -- are they exact? I can't tell you that. And that would be a good question for a dentist, right? But I do think that just based on what we're seeing, that -- if there were problems with these lower prices, I think we wouldn't see as much demand for them, right, for some of these lower-priced scanners. So I do think we have a combination of practices who maybe had one scanner. And now with this more attractive price point have decided, I've got 4 chairs going, I'm going to get 3 more scanners. I'm just going to have a scanner per chair now. I think you're seeing more of that, right? It's also -- I always remind people, dentistry is a competitive business. And intraoral scanners are much more pleasant experience for the patient than if you're using impression material or something like that. So I think that the dentist wants to remain competitive, he wants to retain his patient and that type of investment helps them retain that patient.

Makes sense. And I think...

I think, Nathan, it's very important what Ron said. I think we're at a point now where the DI scanner is becoming more or less standard of use. They still have the market that really doesn't have the latest -- doesn't have anything on the latest, so there's a big demand for this. But I also want to emphasize that these newer players are coming in because some of the traditional players don't -- have not kept up with the technology, have had a couple of challenges in bringing their products to market, to marketing practices that have not really worked because management instability. And these new players are taking advantage of it and they're making it very easy for us to connect them to the dentist because the value is there. Again, it goes back to the opening discussion: We're in a value world. The dentists are, of course, happy to invest in their practice. It's very exciting from our point of view, but they want to know that they're getting good value and that the product is the best for the price.

And so it sounds like with intraoral scanners specifically, there's still a big penetration opportunity, and that's been a big driver of the digital equipment. I guess -- are there other product cycles? Because I feel like a cycle like this where every office or every chair needs an intraoral scanner that doesn't come along very frequently in dental. Are there other innovations that you guys are watching where you think could kind of become more standard within the dental practice?

Stanley?

Well, there's 3D printing that is obviously important. But the area for us that is important is the whole clinical workflow. This is a unique opportunity. There are pieces of the clinical workflow that have been out for a while. But bringing that all together and connecting it to the practice management system and electronic medical record is really a once-in-a-lifetime opportunity. You may have -- I'm sure you noticed that we made an investment in a company in France, implant and alignment field. Yes, that company has a very good market share in implants, I say, the #1 in France. They have a good alignment system. Many say it's one of the better ones. We believe our alignment system is also very good. But what they bring to us is software, and the ability to provide connectivity and open architecture way for all the various clinical applications that will make it easier for the practitioner to operate from an efficiency point of view and from a clinical capability. I would argue that, that is one of our biggest opportunities, and we haven't had one of these opportunities from a Henry Schein point of view in dentistry in a while.