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

To be honest, I don't think interest rates are having a real meaningful effect. I really don't. I mean maybe there's a little bit of a pullback, but we're able to offer up financing. We don't -- we facilitate financing. We don't finance equipment transactions, but we have prearrangements with a couple of financing partners who are very bullish on the industry and still offer, I think, very attractive financing terms. And as a result, I don't think we've lost a meaningful amount of sales as a result of the increasing interest rates. Having said that, if you're talking about a $50,000 kind of chairside mill, that might be -- that's going to be a slightly different conversation, right, especially in today's kind of high-tech environment of some emerging products coming out that people want to have a better feel for.

And along those lines, what is bucking the trend? If we say the whole book is growing slower or I saw some pockets of weakness, where are the pockets of strength within that high-tech equipment?

Well, it's interesting. In terms of a pocket of strength, I mean -- and I'll say this on a normalized basis. But we saw -- we still had volume growth in intraoral scanners, for example, right? But because of the fairly significant drop in average selling price of intraoral scanners, we're not seeing that revenue growth happen there. So -- but there's still demand for scanners. I mean there's still a relatively low percentage of dental offices out there who don't have scanners. And so there's still a large kind of unmet market that we think might be -- this price point is becoming a little more attractive as some of these other -- as medic -- as some of these others come in. And that you could see greater penetration in the market. But I still think there's a good demand for scanners. You just don't see it in revenue -- in terms of revenue growth. I mean on the high-tech side, too, we see a little bit of growth in 3D printers, but that's growth off a very low base, and it still isn't getting to absolute numbers that are really meaningful for us just yet.

I mean the key driver for us in terms of growth in our equipment segment is driving growth within the traditional equipment. That's still 2/3 of our overall equipment book. And of that, say 15% is parts and service. That's a really important sort of value-added service that we offer the customer. So that's like a stable, which shouldn't change that much. And then you talked about the sort of the backlog. That should help support the traditional equipment growth. So in Q1, our traditional equipment grew double digits, offset by a double-digit decline in digital. But the backlog should help support the sort of the traditional equipment sales growth. And we actually want that backlog to come down. It was created by some supply chain challenges in 2021 and 2022. And it's not good for the customer. If the customer is placing an order and they've got to wait 6 months or 9 months for their chair, that's not something that we want to be doing. So what we see is the backlog naturally reducing as the supply chain is back to normal. But for us to do that in a normal manner, right? We don't want big swings in terms of sales increases or sales decreases. We want it to be stable and to gradually sort of like bleed that backlog out into that sales line.

So let me ask you a potentially dumb question but also kind of direct. Why do you think the base equipment has remained that steady? And the only reason I say that is I think of intraoral scanner, which has innovative approach, and I feel like to me is a revenue driver. Versus if you're repairing a chair or repairing a lighting system, it's not setting you to get more patients in the door. So if we are in an environment where equipment spending is tighter, I would almost think that high tech might actually get a bit more of the budget versus the chair. My old dentist had 4 different coats of duct tape wrapped around the head piece. It would pull my hair out. So I guess, why do you think that's the case that it's been so steady?

I think it's partly productivity that we've seen -- again, 2020, a number of dentists have exit the market. It means that the dentists are busier today than they were pre-COVID and have to be more productive. So maybe it's an opportunity. A practice that had one or 2 operators needs to be operating under 3 or 4 operators, so there's an investment that's taking place there. Part of it is consolidation. Similarly, so like if you're a DSO, you want to brand your product similarly between different sort of practices that you're operating. It's a -- it's probably -- today is a more competitive world now. The private practice can't really sort of operate and gain new patients if they've got a drab office. So they've got to continue to invest in order to compete against the DSOs. So a combination of market demand and competition, I think, is driving investment in dental practices.

And there's also been -- think about what the dental practices have gone through since the beginning of the pandemic. You had a situation where you got a month where the offices kind of shut down. Slowly, people started going back. You had a lot of -- now you had a fair number of dentists decide, I'm retiring, I'm out, right? You also had a pretty significant shuffle of patients, people who were going to a dentist that was near where they worked. But now if you're working at home, you were changing dentists. So you had -- there's been kind of this odd dynamic within the end market that has created a lot of opportunities for dentists to expand their practices. And I think that's what's driving a lot of the traditional. But I think it also created a -- I think it may have actually created this market that wasn't growing a lot, meaning that it was constrained by its own capacity. And as we get these chairs out, a lot of these chairs are expanding chairs. They're not new chairs. These are dentists that are expanding their practices. It expands that capacity, which is good for us over a period of time.

Helpful answer to my admittedly potentially dumb question. I want to go back to the Investor Day from the end of February. You've always had specialty products business. You've always had a technology business. But walking into that event, it felt like there was a very strategic flipping of the company priorities in terms of if you just look at the deck, specialty and tech first, and then the more traditional business after. Maybe give us a sense on where you think you stand right now from a competitive perspective across your major specialty products. We'll start there. And then in that constant dance, balance between working with manufacturer partners versus being competitors to them?

Yes. So I think on the specialty side, I mean, obviously, we're very bullish on the implant business because we just went out and we disclosed a transaction with the largest implant, the leader in France in implant and then the leader in Brazil in implants as well, that we have signed but not closed yet. And I think that as we look at the specialty markets, I mean you're right, there is a delicate balance that we -- I feel like we achieved quite fairly with our competitors in the implant industry who also are our suppliers of certain merchandise. The -- we -- I'll put this delicately. Years ago, we offered to distribute their product. They didn't want us to distribute their product. So if we wanted to be in that industry, we had to go get our own manufacturers. And that's what we did. So it wasn't like we kind of went behind their back on these things, right? This is -- this was something that we all chose to do through our own elections. And I think people respect that. But we feel very good about the implant market and the future of the implant market. We do think that there's a large unmet need. There's a lot -- there's a high percentage of people in the world who need an implant who don't have access to an implant right now. And we think that access to care is coming, and it's becoming more of a standard of care at this point. That's going to be one reason why we are willing to invest as much as we are investing right now in the implant market. Other specialties include endodontics, which has been a very steady business for us. It's much less vulnerable to, say, an economic withdrawal. Endodontic products are typically used for root canals. If you need a root canal, you get it. You're in pain. You don't wait until you got more money. You go and you get your root canal. And then we also -- we're still in orthodontics. We'd like to be a bigger player there, but I think we're getting a little bit of traction. And we feel like we can ultimately be a bigger player in orthodontics as well. So yes, we're really kind of leading with that specialty side. We're not ignoring our distribution business. That's our core business. That's what's really gotten us the -- into the door with so many practitioners. And now we can work with these practitioners to help them expand into specialty products, into our Henry Schein One software products, et cetera.

And before we get into software, so maybe sticking with implants. It's one of the areas of the world where being a value player is not a dirty word in terms of description. But obviously, it's been a market that, as long as I've followed it, it's been heavily competitive. So how much of your approach to market is balancing the best product versus the best reach? Because you serve the most dentists in the world, so it gives you a very strong competitive leg up. Where do you think -- or what drives more of the -- your right to win?

There's not a whole lot of differentiation between the physical product, a premium implant and a value implant. And the value -- the premium pricing really comes with the support service you get, right? So what happens is if you're an oral surgeon who might be doing -- willing to do some very complex implants, you're going to want to use a premium product. You hold up that premium product and that value product, you're not going to really notice much of a difference, if any. But you -- if you have a kind of a complicated procedure, you're going to get additional support from Henry Schein in terms of completing that procedure. If you're somebody who's willing to do a basic implant, you're not going to do the complicated ones. You're going to ref -- maybe you're a GP, and you can do basic implants, but you're going to reference your complicated ones to an oral surgeon. You might be willing to use that value implant. So that's where you're seeing kind of the dynamics at play within those markets, right? I think as the revenues grow of the so-called value market, I don't think that -- in some cases, maybe they're taking a little bit from premium, but I think they're really almost like 2 distinct markets. I think as the value market grows, it's penetrating into markets that previously didn't have a lot of implants, whether it be in Eastern Europe, certain markets in Asia, et cetera.

And I'd just add something to that, Ron. so I think part of the -- yes, ultimately, the sale is the implant or the specialty product. But a lot of the sort of the sale is based on either technology or service. So in terms of service, that service comes in terms of customer support, product education, potentially select clinical support in terms of that case management, things like that. So you've got to be able to provide those services to the practitioner to help them with their procedures, whatever they're doing with their patient. The other way to sort of to help the customer around it is with technology, making sure that you've got good placement design software, which is integrated into your practice management software, your patient record keeping, insurance claims management, et cetera. So without those services and technology to help the customer, you're not going to sell the implant in terms of the end part of the sort of the purchase chain.

And even if they are separate markets growing different rates, I think back to '08, '09, when it did feel like that actually was a period of some share shift from premium to value, just because the world was imploding. As we move into end of this year and '24 and whether we go into a recession or have recession-like conditions, do you feel like that's potentially in play at all? Are you hearing that from your dentists? Because obviously, it seems to me like that would be something that position -- Schein should be well positioned for?

Yes. I mean it's hard to say. On the implant side, it's hard to say, right, what would be the actual shift. I mean I got to believe it takes something fairly significant for an oral surgeon to change what implants they're using. I really do. I mean I don't know if they're going to be willing to change that value play. The patient, quite frankly, is relatively ignorant to what kind of implant they're getting, right? So the patients aren't coming in and saying, I want that. I want an implant from X because it's cheaper. That doesn't really happen. So this is really the surgeon or the practitioner making that decision. So I think if they believe my practice is starting to lose business because the out-of-pocket costs associated with implants, which can be pretty high, needs to come down. But for me to do that, I got to go to a value play, then you might get some of that, right? But I don't think that's going to be a seismic shift, so to speak.

Turning to the IT side. We'll probably run out of time but I'll do my best anyways. I mean, Dentrix has been the market-leading practice management solution for as long as I can remember. But the portfolio continues to get bigger. Can you maybe just give us a sense where you feel you are competitively? First, I would say, on the administrative side, which practice management, then I want to get into kind of the clinical side after.

Yes. I think the practice management side is -- one of the things that has really helped us is it's ease of use, and it's common platform is very popular with the DSOs. It allows them to -- they would like to have all their practices on the same systems, if at all possible. And we have that scale that we can offer up to them. And then you start having kind of the add-ons that you can provide with those practice management systems, such as business analytics. We have a tool that allows each of the practices to get a very good dashboard of how profitable are they, with various different KPIs that they can go through and it allows the DSO to look at what are the outliers, both positive and negative, and how do we learn from these things. So I think that's one of the areas that we're trying to -- where we're getting really good traction. We're seeing some transition from Dentrix to Dentrix Ascend, which is the cloud-based system. And I think we'll continue to see some transition there. Graham, do you have anything you want to add?

There's some investments we've been making around some of the sort of the revenue cycle management products to make sure that in this world of paperless, that we got a product that supports that, whether it be paperless statements, paperless invoices, paperless claims, et cetera. So that's something that's evolving. And I think certainly, this last quarter, we saw some very, very good growth in the revenue cycle management part of that business. And then practice relationship or patient relationship management is another area where we've had a number of products, some of which slight compete with each other. And really, this is a priority for us over the last year that we're doing at the moment is trying to consolidate those products. That we're taking the best of functionality across the product line to be able to have one product, which is a leading product to compete. The competitor in that sort of like part, it's a very fragmented part of the market, whereas like Dentrix and the practice management part of the business, there's only like a couple of players. With patient relationship management, there's a number of different smaller companies that are out there competing. None of which can like provide the sort of the holistic or like full range of services. But it's still like small businesses that have got certain niches that we'd like to sort of be able to compete effectively against them, unless they provide the full solution rather than just a piecemeal product.

I'm going to squeeze this in. We'll run out of time probably. But you introduced some new clinical applications, some kind of workflow-guided products. What's been the early uptake and early feedback from your dentists on that?

I think that's still kind of in -- I don't know if I want to call it the beta phase, but that's really -- and that's really a product that we have kind of adopted from Biotech, right? So it's -- we're very early phases of that, but we've had a lot of kind of discussions with some of our larger customers about what we see as the advantages of this, getting feedback from them, and we're really excited about the future opportunities that this kind of platform, this kind of workflow platform can provide, because we think it can really provide a lot of efficiency to the dental office, which gets our customers very excited.

I'll load up the questions next year. Ron, Graham, thank you so much for being here for updating us after earnings. I know it's a quick turnaround, and thank you, everyone, in the audience.

Great. Thank you, Michael.