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

Pleased to move forward and have Henry Schein with us this morning. I think we've got a lot of members of the team. Joining us on stage is Stanley Bergman, Chairman and CEO; as well as Ron South, Senior Vice President and Chief Financial Officer. And Stanley was just saying it's great to be back in person and it is. And great to see you guys. So I appreciate you taking the time.

I'm going to jump right into questions. Again, if you guys have questions, go ahead and yell them out we'll turn the floor over to you. But maybe I'll just kick things off on where you left off in the 1Q '23 earnings call, and at that time, used sort of the term consistent when we think about trends. Is that what you guys have continued to experience and let's sort of make it specific to the North American consumable business on the Dental side?

Yes, Jonathan. First of all, let me reiterate. It's great to be here, seeing our friends in person. You're all great actresses and actors on screen, but you're personal now. So that's great. Our business has been pretty stable for a while in terms of consumables, medical equipment. You have to look in terms of growth we've had company-wide, about 6% internal growth for a while, 5% to 6% plus. Within a particular quarter, it could be less, it could be more, depends on the comparables. But essentially, patients are visiting dentists again. There are some rough spots, particularly with hygienists. They have not come back to the market yet. So in some parts of the country, there's a shortage. It's not always easy to get a dental appointment in parts of the country, but essentially, the demand for dental services remains pretty constant in the United States and in most parts of the world that we're involved, particularly Europe, Brazil, Australia, New Zealand, and the parts of Asia that we're involved in.

Okay. I guess to maybe push a little bit, when you say consistent -- I almost feel like you're being somewhat modest. When I look in the quarter, the North American dental consumable business was up 6% in change ex-PPE and that was off of a 7% comp and your 2-year stacks or 13% inching. And covering your business for quite some time, that would be well above normal, right? I think about 2 years stacks more high single digits. So was it a calendar? Is there a little bit more price? Or what can we attribute to that 13%, 14% 2-year stack? And how do we think about it going forward?

So Ron was mentioning earlier on one-on-one, and I think it's nothing secret. But when there's a little bit of a spike in flu or COVID, our medical business goes up and our dental goes down.

That was 4Q.

Exactly. And a little bit also in the first quarter of last year. Then there's a little bit of calendarization. I don't know if that's a word, but there's a bit of that, that goes on. So taking out all of that, our business is pretty stable in terms of internal growth. If you look at it over a couple of quarters, you will see that.

Okay. And maybe most importantly, when we think about things going forward, is that high single-digit American dental consumable, a lot of words here, ex-PPE 2 years. Is that still the right place to be? I mean, is this that 3% to 4%, 4% and change type of business annually, again, sale, once you take into consideration some of the fluctuations that may occur along?

Well, I don't know exactly the number we've given in the guidance, and I want to be careful not to say something that's inappropriate. But it is pretty stable in North America and outside of North America. If you're looking at patient visits and translating that into orders, taking up PPE on the medical side of the tests. Ron, I don't know what exact number we've guided.

Well, the -- at our Investor Day, Jonathan, which was end of February, we provided some assumed market growth, some of the segments in which we operate, including in dental, which -- the assumed kind of long-term market growth in dental is really in that 2% to 4% range right now. That's market growth we obviously want to be able to take some additional market and exceed those amounts. I think Q1 was a very good -- we had very good merchandise growth. We did have a little bit of benefit of calendar and a little bit of the comp from having Omicron variant fairly rampant last year in January. Nevertheless, we're very happy with that outcome. We expected a good quarter, and we got a really good quarter I think to say, yes, high-single digits for balance of year, we'd be a little optimistic, but I do think that we can do better than market going forward there.

Okay. Fair enough. I'm going to pop over to international. I know, Stanley, you said consistent international as well. But every company here is getting this question, notably in dental, and that's China. And I know you're trying to business on a relative basis, you're not as big in China as some other areas internationally. But there's been a lot of news flow and a lot of noise. And I think the dental industry, I talked about January and February was pretty modest in China, and then we saw a nice uptick into March. However, there's been some recent headline noise and talking about peak infection rates not occurring until June. What have you guys seen in your China business? Did that rebound in March continue? Or have you seen some more noise as of late?

So Jonathan, our business, as you correctly pointed out, is relatively small in China, we are essentially selling consumables. We're not big players in PPE in China, nor are we important players in the specialty areas. We have a small endodontic business and a small implant business. I would say, overall, at least internally, it's not material, so I can talk about it, that our Chinese businesses are making their numbers. So -- but I can't tell you because I don't recall, and maybe Ron does, but maybe Graham was sitting there. I can't tell you exactly what it was, but businesses are doing okay. But it's a couple of hundred million dollars. It's not -- we're not big players in that market.

Okay. But haven't seen any major fluctuations, I guess, to your point or any major pullback of late, so to say?

I don't think there's any region that's closed. There's no -- none of our affiliates are hurting, but it's -- we're not heavily concentrated, and this whole thing with the government stepping in on pricing of implants, we never bid for that. We're not in that field. We -- our customers in China are essentially private-owned businesses. Now if they do business with Schein, the price is right...

So you don't have the BBB headwinds at some of the other players...

It could be trusted. So our businesses...

I do want to jump over to dental equipment. And today, traditional equipment has really been acting as the main growth driver. Maybe just to level set, can you just talk to us about within your book of business for equipment, approximately what percent is traditional? And what percent would fall under digital? Maybe we can start there.

So what we've given some indication is that, in general, and again, this could vary by quarter, traditional -- what we define as traditional. Others may not define it that way. Chairs units, lights, compressors is about 60 to 2/3 of the pie. Now that could go down or up depending on the digital business. It is basically stable. We're trying to run off some of the backlog. We've been successful a little bit, but it's still -- the backlog is still there for traditional. There's virtually no backlog never has been for the digital, which is plug-and-play generally. I mean it's always a little bit. The digital side has done quite well in terms of units, but periodically there's an up and down, maybe 2D, 3D, but the pricing has more or less stabilized. It went down substantially because there was a new entrants in the market. We didn't necessarily work with those new entrants. We've added some of them to our mix. But generally, it's a good business and demand is good.

So I'll get to the digital in a second and I know where you're going with some of these $10,000 $12,000, $14,000 iOS solutions. But to go back to traditional for a moment, which as you mentioned, is roughly 2/3 of the book. That's been driving the growth. I think you guys might have alluded to low double digits. I struggle with the sustainability of that. Like talk to us about what's driving low double-digit traditional equipment because even from a DSO perspective, maybe they're a little bit more selective on some of their denovos? How sustainable is that when we think about going forward?

I don't know what guidance you've given. Again, Ron, you need to provide specifics. But on the traditional business, double-digit growth is not the size of the market. Having said that, we will periodically get some substantial orders from DSOs, and they may be lumpy. But generally, the market is if you take out inflation, is growing, but it's not growing at double digits. So Ron, I don't know what guidance we've given.

No, I think, yes, it wouldn't probably be fair to expect ongoing double-digit growth in traditional equipment. But I think that to us, what it is an indicator of still an above-average confidence level practitioners. Practitioners are investing in their practices. Some of these are replacement chairs. Some of these are new chairs, but they're expanding on those practices. I think a lot of it comes from -- there was some disruption in the industry in the end market with COVID stating the obvious, right? But I think that created some opportunity for a lot of the practices to expand their practices, and we're seeing the effect of that. To us, it's good. The more chairs we can get out there, the more capacity it provides to the end market. And then ultimately, that's more consumable merchandise and everything else that you sell with it. So while I don't think we can continue with double-digit growth in equipment in the long run...

On traditional.

On traditional equipment in the long run. The fact that we have it now is just, to me, is a good bellwether for the industry.

Understood. And I think there was a little bit of maybe confusion on some of your backlog commentary on the first quarter call. So the backlog was high. Sailing to your point, it wasn't on digital is on traditional. Some of that was a function of some of the supply chain issues that occurred several quarters ago. But the low double-digit growth on traditional was the beneficiary of the backlog coming down. I know you want to get the equipment to your customers. How much further is there to draw down before backlog is, call it, normalize?

Well, there's 2 issues. There's the backlog and then there's the DSO purchases. They can be lumpy. And they're not dialogue going on that they've stopped buying them not. They're opening new practices still and in particular, some of the big ones are doing that, the midsize ones are doing it. And there's -- I'm sure the next question I'll anticipate is the interest rates. I don't think the interest rates are double from what -- at least from what they were. But we are not selling particularly to the smaller practices a piece of equipment at X plus Y interest. We're selling it so much a month. And the monthly increases have gone up 5%, 10%. It's not material. Maybe it's gone up 15%. So the market for equipment is relatively stable. I think people want their practices now in a post-COVID period to look sterile, clean, modern. So maybe some of the older stuff that may be just a sterile as the new stuff.

But it doesn't look that way?

Don't look like that. So in general dentists are doing okay. I mean, I wish we could turn out a few more dentists because we do even better. But dentists are doing okay. And the labs are -- which we're a big player are quite stable, the ones that are small realized they have to invest in digital equipment and the big ones are becoming more efficient to have enough business.

So these are my words, guys, you heard but -- I think in this course of conversation, it would seem traditional still has some legs to it, maybe don't extrapolate the low double digit, but traditional for a handful of reasons, so has some legs to it. Stanley to your point, we had Heartland up here earlier that talked about 100 denovos this year alone, so they're still building out. Maybe to shift over to digital. And if we can maybe pull it apart. So you've talked about some growth, pardon me, from 3D printing. I'm curious about your excitement there. And also on iOS, the units are up, the ASP has been down, but certainly I asked you on the most recent call, it seems like the iOS ASPs are now starting to stabilize. So when can the tide turn if we think back to digital and get some growth back to that part of your equipment book?

Yes, I remember your question because it's the most germane question. I think units on the iOS have stabilized. In a particular quarter, I can't tell you because these are the decisions that generally take anywhere from 3 months to 6, 9 months to be turned from a decision to implementation. So I think the digital -- the iOS is stable. 2D, 3D within a band has been stable for a while. Pricing went down. And 3D Printing extremely excited about it. I would say that the ability to use 3D printing to replace for reconstruction other than the front cosmetic-looking teeth is pretty good. There are studies that show it really works. It hasn't been around for 20 years, but -- and I think for the dentists -- enough dentists think it's going to work. So we are seeing movement towards that. The mills, the expensive mills, which were a potent foundation, we're selling them, but it's not as easy as sale as it was 2 years ago.

Can those 2 co-exist?

Yes, they can coexist because at the moment, and again, I'm not the expert on this, I think you have one of the major players here, they may feel different. But I don't think the volume necessarily for the 3D printing is 100% there yet. And I'm talking about more for the lab. Remember, for us, when we report data, it's not just what was sold to the dentist, it was sold to the lab. And labs are very much historically -- very much from a historic point of view, been a little resistant to digitalization. They're moving in that direction. So there's a big move towards digitalization that is unfolding now. But it's not nearly there yet. They are customers for the mill and our customers for -- also for the 3D. So I think they will coexist for a long time, just like I believe, chair side, milling will coexist with the lab. Not everything is going to go chair side, not everything is going to go to the lab. But the lab will have to become more sophisticated. So I think these markets will emerge in sort of parallel. I don't know which one is going to get the percent -- higher percent of the dollars. But in terms of units, they will kind of coexist.

Dental equipment recapture growth soon as the iOS ASP Digital equipment?

Sorry. I don't know we're in the middle of a quarter, so...

Well, I think what we have said, Jonathan has said, we do think -- when you look at when did we really see the most significant price drop kind of that reduction in the ASP on the iOS was really during the third quarter of last year. So I think the -- I think it's probably the earliest opportunity to -- kind of see like that annualize a little bit and begin to see that stabilize.

It's funny. I remember walking to show up greater New York, which November and seeing really the -- how prominent some of those $10,000, $12,000, $13,000 units where that would be November. So to your point, Ron, 3Q would make sense. Okay. And maybe one more...

The good news is there is a lot of interest in this market. So the dentists are now interested. And I think we are very close to dentist saying, this is standard of care. We're not there yet. Still have to dentists at least don't have this iOS, but it's getting close.

You got something that will always hold on to their previous impressions.

We still sell. We still sell x-ray film.