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

Thank you, everyone, for bearing with us. We'll have one more joining us in a few moments. But for those that do not know me, I'm Evan Tylenda, I lead a European GS Sustain Research team out of London. The circular economy remains a massive theme, I think, goes is quite underappreciated at the moment and it's a personal passion for me. To kind of kick things up, we see 3 key drivers for the circular economy. Namely, one, we're seeing resource prices spiking. We're running into a critical material crisis that's putting a much greater emphasis on material efficiency and recovery by consumers and corporates. Second, we're seeing a rising focus, as we've all learned on net-zero emission, biodiversity in the last panel. This is all going to require a circular economy to actually become a solution to solving for net-zero emissions and biodiversity. For example, a lot of resource consumption is a big driver of biodiversity loss. We want to start to think about limiting the amount of virgin material that we are consuming, to help contribute to net-zero and biodiversity. And then lastly, regulation is certainly picking up, and we're seeing the economics become quite attractive for the circular economy, which we'll talk a little bit about. We have a great group of companies here that comes across the value chain from raw material manufacturers, distributors, innovators, and helping to dematerialize the economy through the adoption of not just circular techniques but also just simply good old-fashioned innovation, which I think brings both economic and sustainability benefits. And so for our panel, we have Willie McLain, Chief Financial Officer at Eastman; Stanley Bergman, Chairman and Chief Executive Officer at Henry Schein; and Emily Leproust, CEO and Co-Founder at Twist Bioscience. So thank you all for joining us. Let's get started.

We're going to talk first about strategic business and sustainability priorities. Willie, why don't we start with you? Eastman, launched its 6 principles for a circular economy. Can you talk us through these? How do the circular economy fit into your core business and your sustainability strategies?

Thanks. I'm happy to be here today. Key to the circular economy and bringing that to the polyesters, we support reduce, reuse and recycle. Also, we believe that new technologies must be material-to-material and not waste-to-energy. New technologies should also -- I'll call it, improve the quality of life, and in that lower carbon emissions. Additionally, mechanical recycling has a place, and we think it must be complementary with existing mechanical. As CFO, you would expect these must be have economic returns with them as well. And that's a core principle as we look at this. And then companies must be transparent, there has to be transparency to be successful. And as you think about that, that could be with mass balancing, et cetera. Eastman has been a world leader in copolyesters for durable applications, as well as cellulosic biopolymers for decades. And what we're doing with these processes is we're bringing to bear the circular economy now. And as we bring those, we're doing it in a way that not only creates a circular economy, but it does it in a manner, we hold the bar high up, it's got to reduce carbon emissions. It should be better than existing technologies are bringing, so that you can have a circular economy and a better climate together.

Then handing over to Stanley. Henry Schein operates a very large distribution network for hundreds of thousands of products across the U.S., Europe and Asia. Can you discuss some of the sustainability strategic priorities for your business and highlight where you think the circularity fits in?

Thank you Evan, for inviting us. Good to be on this panel today. Thank you all for being here. Henry Schein is the largest provider of products to dentists and healthcare practitioners outside of the hospital. So our focus is essentially on helping practitioners operate a more efficient practice, so that they can provide better clinical care. This whole area of environmental concern is, of course, understood by our customers. They know it's the right thing to do. I would say our customers in Europe are more tuned than, for example, in the United States. The challenge is how to turn this into something that's practical. And for our customers, we are working with them on explaining how they can use more environmentally friendly products in their practice. So we came up with a program some years ago called Environdent, environmentally friendly products in dentistry and practice green product offering of basically the major products used by dentists that we launched about 1.5 years ago. It started in Australia, it's now in the United States and in Europe. So, educating that there are multiple options on products, but you can use an environmentally friendly product and why? And then what's important on our infrastructure? We manufacture many of the products we make, and we distribute practically every product that a dentist or a physician may use in their practice. So the whole logistics, advancing the logistics in an environmentally friendly way is a program that is key to us as well as on the manufacturing side. So these are very, very important. Now, we also repair installed equipment, repair equipment, of course, maintain the equipment. It's done through a fleet of over 1,000 vehicles in the United States and another similar number throughout the world. How do you make this more environmentally friendly? A key part of our strategic plan? Of course, the electric vehicles are very helpful, but they're not really available in rural areas, the charging capability. It's in our plan. We're advancing this. And then the key is with our suppliers. Many of our suppliers are large companies, relatively easy to understand what they are doing. It's the smaller manufacturers that we're committed to helping them advance their production and the availability of their products, logistics in a more environmentally friendly way. So those are just a couple of the areas we're working on. It's -- our results and the direction we are heading in and reporting against the direction, is contained in our annual sustainability report.

That's perfect. We'll dive deeper into some of those. Emily, over to you, can you discuss Twist Technology? What is silicon-based DNA writing? What are some of the use cases? And how can it be leveraged in various sectors to enable not just circular outcomes but more sustainable outcomes?

Yes. Thank you very much for the invitation. It's a great pleasure to be here. At Twist, we write DNA from scratch and DNA is four letters, ACGT, and so we built a printer that prints DNA and silicon in 3D printing, because we've miniaturized the chemistry. So instead of our competition, they use about 50 microliters to do the synthesis, and that's the size of a tear drop. And then we've reduced that to 10 picoliters. It's real hard to comprehend. But the bottom line is that we reduce the volume of [ reagents ] by 99.8%. And so that is less cost, and so we just have a cost advantage, and that's how we can be extremely competitive, making DNA. And then -- so not only the way we make DNA is more sustainable, but in addition, our customers used the DNA to do great things. It's used to diagnose and treat diseases, which, obviously, that saves the most important capital of all, is the human capital. And then it's being used for materials either to do a Drop In Replacement, where instead of getting fossil fuel from the ground to make chemicals, you can take biomass and then use enzyme, E. coli, algae or bacteria to do fermentation. And fermentation is the conversion of biomass into alcohol and CO2. So, that's beer in France [indiscernible]. And so instead of -- if you change the genes of yeast, instead of making alcohol, you can redirect the chemical engineering that happens inside the yeast to make any chemical you want. And so the one thing is just a Drop In Replacement. Well, now you have the same chemical, you can't tell the difference, but is more sustainable. Frankly, nobody cares, the driver is that it has to be cheaper. If it's cheaper, people will switch. And then there's an opportunity to make new materials that you could not make from oil. And so if the last 100 years with the century of plastic, I think in the future, we'll be able to engineer protein to have the same characteristic or even better than plastic. But obviously, it would be more sustainable to have a protein economy instead of a plastic economy. And then one last use case that our customers use our DNA for, is for the engineering of plants. And the idea is -- the opportunity is to make plant more productive and so you reduce the amount of land you need. So actually, that increases biodiversity outside of that very intense production. And we can also adapt the plants to a challenging environment, more extremes of weather. You can also adapt to using more natural ways of doing pest control. So, instead of using harsh chemicals, you could synthesize the natural pheromones that insects use and trick insects into not reproducing. So there's a number of great things that can be done with the DNA we make and the DNA we make is done way more sustainably than other ways of making DNA.

Excellent. Well, let's get into capital deployment and the economics here of some of these technologies. So Willie, I go back to you, talk us through some of the customer demand landscape. What does it look like for circular solutions? How is Eastman deploying capital around that? And then if you can dive into some of the economics of these initiatives, what are the IRRs? What are the project lead times for these circular investments? And I guess, how does that differ from the overall business?

Well, it's a very timely question because we're getting ready to operationalize our first world-scale facility. As I think about it, each of us in the room are consumers, and really this technology existed decades ago. But in the last 5-years, there's been a growing momentum, and that momentum is each of us are willing to pay along with the brands, higher prices for recycled content versus fossil fuel. And we've been able to test that in the marketplace with some bridge technologies that brands are performing extremely well. So one, consumers, there's a demand for it. Two, as we think about leveraging, I'll call it, in the polyester environment, we're bringing that to bear with our facility in Kingsport. So we're bringing that. We've derisked what we're bringing because that's where we produce our polyesters for our first facility. Since December of 2021, we more than doubled the brand that we've signed up for our first facility. We have enough pipelines that we have lead generation that could sell out that first plant. And this is for our specialty products. Like I said, we've been in this for a decade. As we think about where we think this can go, we have projects in France, as well as a second U.S. project. And we've got baseload customers that are signing up today to support the fundamentals of this project to meet their sustainability goals. So as you think about what we're trying to do, it's meet the sustainability goals of our customers in ways that they can achieve that through the way the marketplace is today. From a return perspective, we have two business models. One is our specialty business, and we expect with that first facility to have return on invested capitals of greater than 15%. The other solution is bringing solutions like we're bringing to PepsiCo, and I call that our circular solution. This isn't about providing a polyester. This is about providing a sustainable solution that they can achieve today in the marketplace through mechanical, and we can bring that in a world-scale. Those projects, we expect because of the returns in the business model to be greater than 12%. So we're excited about where we are in this journey. We expect to have revenue around year-end, and we're bringing a world-scale, where mechanical can't provide that solution.

Excellent. I may come back to some of that. But switching back to Stanley. Henry Schein provides repair services for handpieces used in dental practices every day. Can you give us some stats on the size of that repair market for handpieces? How are the margins on some of those services? And are there any other categories that you see where you could offer more of a sizable repair component? Or is there an opportunity to work with suppliers for other pieces of equipment?

The handpiece area, it doesn't seem like it's a very exciting area, but every dentist uses the handpiece. And the business we're in, is, of course, ensuring that dentists have the right handpieces and exactly in the right place at the right time that they have the appropriate sterilization requirements dealt with each day. There's a lot of activity that goes into that, that can impact the use of energy, environmentally friendly usage of products and that is an area we're focused on. Our business is relatively small in that area. I mean we have big market shares, a couple of hundred million dollars. But I would say that's a great area. The area that is really exciting from an energy point of view is the repair of in-office equipment. So think of it. You sit in that dental chair and if that chair is not working, that dentist is out of business. So we have the largest network in the world of people, technicians that go into the practice, install the equipment, repair their equipment when it's down. So where we're investing, Evan, is in software to limit -- preventative software to limit the number of emergency calls. Every emergency call is a result of a piece of equipment not working, a delay in the efficiency of the practice and more important, a truck that has to go out, use up a lot of energy, pollute the environment, if we can reduce the number of trucks, the [ guard ] with technicians, it saves the practitioner, money. And it's more efficient for us and it's profitable to us. So we are investing significantly in driving the efficiency of the tech knowledge used in the practice, the equipment used in the practice, through processes that ultimately result in maintenance of the product or in fact, repairing an issue, a problem in the practice virtually through video or through a telephone call. These efficiencies will drive our profits for Henry Schein, tens of millions, and probably hundreds of millions in terms of saving on the cost of utilities, labor cost to the practitioner and efficient operation of the practice so that the practice can be -- the capacity, the practice is going to increase. And right now, there's a bit of a challenge because there is more demand for dentistry than capacity. So we will free up capacity. We add all of that up, we talk about hundreds of millions of dollars, that's billions of dollars around the world.

So if I hear you correctly, it sounds like the element of predictive maintenance, which the whole goal of that is to reduce downtime, promote better asset utilization. Certainly, circular. I mean, can you talk maybe a little bit more about some of the demand you're seeing for some of these new solutions? Or is it still too early?

No, no. It all relates to preventive maintenance in the end, fewer visits to deal with problems in the practice, maintenance problems that could be avoided. So, the demand is increasing, dentists are not aware of it necessarily. Our field sales consultants make the dentists aware of this, and there's a tremendous uptick. Generally, making the whole maintenance process -- preventative maintenance process more efficient is highly profitable for us, for the customer, maybe less visits, as I said, but also more share time. And we're educating our customers on this technology. A lot of this is AI-driven, is relatively new in our industry anyway. And the demand is there, it's growing as education grows.

That's excellent. So boosting revenue, reducing costs, that's helpful definitely to the economics. Emily, back to you. What are some of the best metrics for investors to measure the financial success and the sustainability benefits of your products? I know when we connected, you talked about revenue, margin, market share. But just what are you replacing? As well at the same time, and what are the benefits that come with that?

Yes. No -- as far as -- I'll do want to answer it into two parts. The first part is Twist related and the other is our customers. So from a Twist point of view, it's about revenue, gross margin and cash in the bank at the end of the year. And again, because we miniaturize the way we synthesize DNA, we have lower cost, which gives us a competitive advantage. And recently, we've measured how much are we saving. And so we analyze what is the carbon emission to make the gene. And so again, if you go on our website, it's been in your [indiscernible]. If you've clone in your life, you know that cloning is a 21st century equivalent of coal mining, is really, really tedious. But we do it for you. And the old way of making genes -- to make one gene, it's the equivalent of driving a car for 59 miles. But our way of making a gene is the equivalent of carbon emission of driving a car for 0.09 miles. So if you buy a gene from us, you'll save about 59 miles of carbon emissions. So buy one gene a day from Twist and you save your commute way. And so that's the benefit that we bring, lower emission while we do as a business. And then for our customers, they are leveraging the new technology of synthetic biology to achieve great, great things. And our customers are really swinging for the fences. You can think of, for instance, blue dye to make a gene, the indigo dye, the production is incredibly polluting. But you could engineer a cell to make that same dye, but by fermentation, which is very non-pollutive. And again, if it's the same dye, but you have to pay more, our customers don't believe that will work, we will have to make it in a way that's less expensive or another opportunity that our customers are going after is can you digest plastic with an enzyme to go back to the monomers. As we all know, plastic bottles are recycled. But in practice, they are not, it's just a marketing ploy to make customers feel better. But with an enzyme you could go back to the true monomers and achieve a true recycling. And so in the grand scheme of things with our customers are trying to do is realizing that everybody eventually, they are willing to make small sacrifices, but nobody is willing to make big sacrifices. And so to make changes at scale, we'll have to just deploy technology such that we offer a better lifetime and you get sustainability for free. And I think that's what our customers are driving towards, and they are leveraging our customers to our technology and our DNA to get there.

I mean maybe really quickly, what are -- what are some of the roadblocks that you're facing in terms of adoption of some of the new technology?

We're doing really well. I think this year, we guided, I think, $240 million revenue. I have to be careful because it's our week 52. So end of fiscal year, my favorite week of the year. And then next week is my second favorite week. Week 1, we go again. So we are doing well. However, at the same time, when I look, we actually only have 4% of customers use us, who know we're better, we're faster and we are more sustainable. So there's still a lot of market shares to go get for us. And some of the roadblock is just inertia. It's -- the alternative is good enough. And so we are laying in way, as soon as the competition makes a mistake, we grab the customers, and we have a really, really great retention rate. Well, like the hotel [indiscernible] you can check out but you can never leave. So once we get a customer, we can build on that. But it's all spreading the word. And in the near future, we'll start to use sustainability as a marketing tool. We have not done it yet. So far, we've been winning on the merit of our products. Again, we're faster, we're better and cheaper. But now that we have carbon emissions measured and validated, we'll go to customers that have their own carbon reduction targets and use our data to convince them that by switching to us, it will help them achieve those targets.

Excellent. I mean, Willie, back to you. You mentioned some of the projects coming online. What are some of the key milestones that the crowd to be aware of around the commercialization? And what do you -- when and where do you expect the cash flow financial impact of being, when that's operational?

As we think about the goals of our circular economy, we're investing $2.25 billion. So it's not a small investment. We expect that we're going to deliver roughly $450 million of EBITDA by 2027 as a result of that. We're not going to have to wait to see that. As I said, we're going to have revenue around year-end. We expect incremental EBITDA in next year of roughly $75 million from our first facility. By the end of 2025, we expect that to grow to a run rate of $150 million. So as we see the path that we're on, the brands that we're aligning with and the criticality is the plastic bottle right there on the table is a better feedstock than fossil fuel. It's already been cleaned. It's already been processed. And we can take that and basically make the molecule identical to virgin. As we think about alternatives like mechanical recycling, in many cases, it can only handle clear. There are so many things that we use as consumers in our houses as we go out to eat. Many of you are probably looking at a clear clamshell today of plastic. In the future, we want that to be recycled. And if it's food contact, you want to be sure that it's from something that's been through a process, that's been purified. So both from how we are bringing this forward, it's here today, it's not theoretical. We've been a company for a 100 years. We produced polyesters for 70. We've been practicing methanolysis for over 30 years, and we're bringing that to the market today, and we're aligned well with brands that believe in that because many of you are supporting that. We realize that there needs to be change. And ultimately, that it needs to be more like the model from aluminum, that things are recycled and that the change will occur and that there will be policy that's enabled. But we're showing today that we don't need policy, to actually generate financial returns. What we need policy for is to make the supply chains more robust because the scale at which we're talking, it's small today relative to the global polyester industry.

And maybe sticking with you on -- can you talk to some of the biomaterials because there's already a cellulosic business that Eastman has. And give us some of the figures on the split between chemical recycling/bio-based feedstock? I mean what do you see that we should be aware of?

We've been in cellulosics for a 100 years. As you think about that, it's wood pulp in many cases from certified forests. Additionally, as we think about that, we have carbon renewal technology that we can use for -- to process that pulp into a biopolymer. And today, so you can have recycled content for roughly 50%, and you can have certified wood pulp and you have a true biopolymer today. We're being successful in that in textiles, that we're bringing textiles in, we could process that into the feedstocks and then produce garments that you may wear today like active wear in the textiles industry. Where we're going and where there's a real need also is like with Aventa, as you think about protein trays as you go to your grocery store, they're looking to replace the polystyrene that are -- if you look at your chicken, it's on a yellow clamshell, right? As we think about the future, that can be with a Eastman product called Aventa, that biodegrades, either in industrial or in-home applications. So you can achieve both, end of life in a manner that also had recycled content. So we're excited about what that can bring. And we've talked about that growing from something small to what we believe can be a $200 million business with our -- primarily our existing assets. We don't have to make investments.

That's excellent. And Stanley, going back to you on one thing you mentioned in your intro remarks is the electrification of your fleet. I mean, technically, that is circular. Talk us through some of the goals there and the progress on that?

Yes. Well, obviously, if you can take a repair truck and move it to a more efficient methodology for visiting the dental office or you can have less visits, the costs will go down better for the environment. But I mean, I think what is really important is what we're doing in healthcare in general. We are driving efficiency. For example, when you go to the dentist, well, the traditional way of getting a crown or bridge would be to take an impression, send that impression to the lab, come back to the dentist and then likely have it fitted and maybe not perfect, send it back to the lab, come back. What we are doing now is same-day dentistry. In other words, mill the crown and the bridge on exactly the same day within an hour or so of the -- taking the scan, you can have your crown or bridge put into not installed, adjusted by the dentist. Think of the -- how many -- the convenience, how many less travel hours are involved. We're doing the same on -- and now, of course, not only through chairside milling, but 3D printing is advancing. And this is driving efficiency, improving on the use of the efficiency of the practice. And of course, the patient's time, but also the whole movement from taking care of procedures in the hospital to the Ambulatory Surgical Center and into the practitioner's office. Huge convenience and a significant reduction in transportation costs and utilization of environmentally unfriendly products, namely in particular, gas. So the whole efficiency in healthcare, same-day service, walking out of Ambulatory Surgical Center immediately after a procedure same day is driving down costs. We're in the middle of all of that. We're driving it in a significant way and is totally environmentally friendly.

And that's just good old-fashioned efficiency driving real economy outcomes. Emily, back to you. You announced a partnership with Polycarbin to circularize plastic and laboratory consumables. Can you elaborate a little bit on that? And also give us a sense of DNA sequencing space, what are some of the innovations potentially on the horizon that we should be aware of?

Yes. Great question. So we announced a partnership where the plastic that we use to make genes is recycled and reused. And so we go back to circular economy. And the report is that we have 7,000 tons of plastic that we took out of landfill. And -- so first, it's great. But at the same time, I just mentioned that our guidance for the year is $241 million to $242 million. And so really the important metric to me is that we're going to make $241 million to $242 million of revenue with only 7,000 tons of plastic. So that is really -- the real punchline is that because we miniaturized all the chemistry that we used to make DNA, actually, it's an extremely small number of -- small amount of plastic that is needed to make all those genes and have all that big impact. And I think what you are referring at the end was, in addition, there's a future use of DNA where you can store data in DNA, you can store data is 0s and 1s, you can store data in ACGT. And you could put, I think, dozens of Google data center in the sugar cube. So you can imagine that you could store data in a very dense fashion, which will save a lot of energy that is currently needed to keep those data centers going.

Maybe while we have -- we're running out of time, but I want to do a quick one for everybody here on regulation. How will regulation be needed to support the circular economy? Are there any differences in what you're seeing across markets? Certainly, EU is progressing quite fast on their circular economy action plan. You're seeing recycling requirements for packaging, textiles, electronic equipment recycling, all sorts of things. Anything that anybody wants to take first?

Well, there's more regulation. There's more illogical legislation, but there's also a lot of good happening. So we need smart people and we need uniformity around the world because to move medical products around the world today is very complex. It's costing us a lot of money. It's costing the patients a lot of money, and it's not enabling. It's preventing good products that could help us all from being available to consumers or to practitioners around the world. So good legislation is important, but efficiency and ability to move product and make it available to all practitioners is very important.

I would just echo, it needs to be smart regulation as we think about the balance. We need public private partnerships. Also, we need the investments and networks and supply chains that don't exist today if we're going to continue to make the progress.

Reverse logistics is a big one. Emily, any thoughts?

Well, I mean we'll take good regulations. But I think for us, our view is that to get really true change that is sustainable, we need to just make those new products that are just so irresistible that people go away from carbon -- from fossil-based materials and lifestyle to a more biomass-based lifestyle. And if the products are better and cheaper, we don't need regulation to get there as the people will mass move to that better way of living.

Perfect. Well, I think with that, we're out of time, but I want to thank all of you for joining, and thank you.