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

And just last question for now on instrumentation and equipment. You hear from your sales reps, you hear from the field, is there anything that you think right now or your customers right now is missing from an innovation perspective they want to see move faster and whether that's 3D printing or something else, like I'm trying to think of what could be the next many or significant super cycle products beyond replacement?

Yes. I think that the ongoing efficiencies that the practices can derive from digital dentistry is probably -- continues to be that opportunity where you can, one, provide better care to the patient. You can also -- in a perfect world, you can see more patients over the course of the day because you're able to get through things more quickly. Therefore, there's a return on that investment of that high-tech equipment. . The pain points in the practices right now are more around the administration of the practice than the operations of the practice, I would say. If you sat down with a group of dentists and you wanted to start talking to them about what are some of the more challenging things you have. It's not going to take you very long in that conversation for them to start talking about dealing with the payers, dealing with understanding the patient's eligibility for care when they initially come in, those are all things that really create inefficiencies in the practice. They end up with their front office making a lot of phone calls to insurance companies and doing things that quite frankly can really slow down that revenue cycle for them. That's an area of emphasis we've been really working with our customers on in an effort to kind of improve the flow of information and that kind of broader revenue cycle management for them.

And maybe we'll stick there for a second because obviously, you have a wide portfolio of leading software Internet-enabled brands led obviously by Dentrix, which is quasi-ubiquitous across the product management side. Where have you seen the biggest lags -- it's been a few years now since the Internet Brands merger, where have you seen the biggest lags for you to pick up incremental wallet share, mind share of your customers on that technology and obviously, that brings nice margin accretion to the enterprise as a whole?

Yes. I would say, most recently, it would be on that revenue cycle management piece, especially on the -- when you kind of [indiscernible] 100% eligibility, it's just knowing -- it's knowing -- so that the patient knows immediately if they require some form of treatment, what's it going to cost them, right? That's always been, I think, a difficult thing for the dentist and the dentist says, look, you've got a patient in the chair and you identify the need for a specific treatment. The patient says, well, how much is it going to cost me, the dentist doesn't know. And so now you're just kind of like, are you just going to trust me to do it, and you're going to be able to pay for it that's a difficult thing because they don't know what type of coverage they have. That is part of our Henry Schein One offering, that whole eligibility process is part of that offering, right. I would also say and this has become an attractive feature to our DSO customers. Business Analytics is taking on a greater importance, getting that dashboard snapshot of kind of certain metrics of how that particular practice is operating and identifying outliers, if you have a group of practices, who are the lower-performing ones in certain metrics versus the higher performing and what can you learn from that in order to improve the operations of that practice. That's a feature that we that when we purchased Jarvis Analytics about 4, 5 years ago, we were able to add to the portfolio. And then lastly is kind of the introduction of Detect AI. We've had, I think, very good success with that. Heartland is now using Detect AI in their practices. And Detect AI will allow a dentist to take an X-ray of a patient, bump that X-ray up against a database of X-rays and it will allow them to identify carries, which is kind of a precavity with -- that they can do through the AI tool that might not be detectable by the naked eye. And that allows for a much more pleasant patient experience in terms of treating that versus treating a full blown cavity that may not be quite so pleasant. So those are all areas. What we've seen, for example, from the -- our customers who are using Detect AI, they are getting meaningful increases in restorative procedures as well as periodontal procedures versus prior to using that product. So that's good information for us to have as we talk to other potential customers there because there's clearly a return. It's a subscription-based service that clearly brings a return. But those are all part of the spectrum of what we're introducing through Henry Schein One.

Turning back to the specialty side. This has become, thanks to both organic and organic growth, a much bigger segment than I think most would have anticipated. As you think about the organizational goals for your different categories, endo/ortho implants, most companies don't go out and say as long as -- we're #3 is like the rallying cry, but in this case that there's some elements about being a more ubiquitous provider, you're not the market leader. So how do you continue to calibrate your goals thinking back versus last year's Investor Day and where you're executing versus where maybe areas you've fallen short across some of your different specialty categories?

Certainly. We're proud to be #3 given where we came from, right? And it's also -- I think it's important for people to hear that who look at us as a pure distributor because we're not a pure distributor. And the investments we've made on the specialty side, and when we say we're #3, we're referencing implants, we're #2 in endodontic products is that that's about a 1.2 -- specialty is about a $1.2 billion a year portfolio for us, which when you're looking at our revenue of $12 billion to $13 billion feels like a small number. Given [indiscernible] getting manufacturer margins, it's a much more important part of our bottom line. When you collectively take those particular products and add to them Henry Schein One, our technology offering as well as the other value-added services we have, those are all brands or -- that we control. Those are our brands. We're not reliant on a third party. We said in our Investor Day last year, our goal was for that group of products to be generating about 40% of our operating income. In the first quarter of this year, it was just shy of 41%. So we've kind of reached that goal there. If you add in the private label that we mentioned earlier, you add in private label, private label gets you approximately, call it, 10% more of our operating income. So those brands that we collectively control represent half of our operating income, which is very important to us. So where are some of the areas -- we made a lot of investments last year in specialty. We bought Biotech in France, we bought S.I.N. in Brazil. They really kind of help us fill out both some additional geographic footprint, but also kind of fill out our product portfolio in implants, especially in the U.S., we didn't really have a value implant in the U.S. S.I.N. in Brazil has a value implant that was already approved by the FDA before our acquisition of them and we've been able to introduce that value implant in the U.S. now. And we think that, especially with our DSO customers who are looking to do more kind of basic implant procedures in-house as opposed to referencing them out, they find the value implant to be a more attractive proposition. So those are areas, I think, we've succeeded in. Orthodontics is still an area that we're trying to get some traction in. Biotech, the company we bought in France that is -- we've kind of talked about that being an implant company, they also had a small clear aligner business, and we're taking a look at that clear aligner business versus our existing clear aligner business and how do we get some scale there, how do we do something that maybe increase that traction in orthodontics. That's probably an area that we'd like to get better at sooner rather than later.

Got it. And I'll use just ortho and then use this as a pivot over to the medical side. Because obviously, you made a recent acquisition building on to our orthopedics presence on medical, which I'm still getting used to thinking about the totality of the Henry Schein specialty portfolio beyond distribution in private label. Maybe talk a little bit about this acquisition because this is a little bit afield from what Schein's done previously on the medical side, which has been growing like a weed for long before pre-COVID. How are you thinking about this as a building block for potentially building a broader specialty portfolio if you do want to do that within medical?

Yes. So our investment in TriMed and that was a transaction that we closed just this past April, it is really -- it's orthopedic products that are really at the extremities, right? So it's really kind of the hand and wrist and it's more kind of foot and ankle. It's a different market than if you're getting into hips and knees. There's the Strykers of the world who really kind of have a good hold of that market. But we saw the extremities as a good way to kind of working our way into the orthopedic market because a lot of those procedures are done at the ambulatory surgical centers on an outpatient basis, which the ASCs are a very important consumer segment for us. So this is something that we can kind of introduce to our ASC customers and we do see it as an opportunity. As we learn more about orthopedics, we'll be able to expand on that and perhaps go into other areas. I don't know if we ever get to the point of going in the hips and knees, but there could be other areas that we could expand into with that. Similar to what we did with, what we call, our Home solutions business, also on the medical side. Home solutions is really a group of products that we are selling to home health care providers. We're not the home health care provider. We're not employing the nurses, but we are supplying products to home health care providers. And that is a subsegment of medical that as a market is growing faster than core medical and it gets better margins than core medical. Between our investment in PRISM a couple of years ago and our investment in Shield last year, we've brought them under a common kind of holdco with common management and that, that will kind of function as our platform. We think we can do more investment in home solutions going forward.

And Home solutions is a great example of being able to layer on where care is being delivered. But you're already very much positioned well there by being in the complete, non-acute care side of all things distribution and just continue to outpace volume growth. How much do you see your growth across the medical portfolio as site of care driven versus share driven versus general utilization driven?

It's hard to kind of parse those out I think...

[indiscernible] yes.

I think our general strategy in medical has been follow the patient. Years ago, we actually got out of the hospital business, so to speak, right? Hospitals want to have -- Cardinal is very good at that, right? They want to have 3 pallets dropped on there on a loading dock. They want to be able to place the order at 11:00 at night for 5:00 a.m. delivery. That's not what we're good at. We are better at the small delivery. And as more and more patient procedures work their way out of the hospitals and sort of working their way into the ambulatory surgical center or more and more procedures that were simply being done at physician offices, we really put the focus there. Now as more patients are being treated at home. We're making that investment into the home as well. Utilization demographics are on our side on this, right? I mean I think that as -- especially in the U.S. as we have an aging population, I heard the other day that more people will turn 65 this year than in any year before or any year after in any of our lives, right? So this is a time that we are -- there's going to be more and more people cared for at home. I think it's how the infrastructure is likely going to address the demand for those types of services. I don't think we're going to be building out nursing homes for all these people. There's going to be a greater emphasis on how do you care -- how do you get care at home as what people are going to want so that -- hence, we're making the investment there.

And thinking about the investments being made, especially on the inorganic side, Henry Schein has long had an M&A core competency, just something I couldn't remotely begin to count the amount of deals I've seen you do announce, et cetera. That being said, more recent acquisitions have been more product oriented versus what was a long legacy of great geographic expansion partnering with leading players in the market. How is your team thinking differently these days about the ROI on a deal given that a payback period on a TriMed, on a biotech is a little different than a payback period on hiring the largest dental distributor in France...

Yes. No, it's a great question. And you're right, we do have to look at them a little bit differently. This is part of how do you kind of build out the company to be -- going beyond distribution. And so you do kind of measure the opportunity of a biotech, the implant manufacturer we acquired in France or in S.I.N. the implant manufacturer we acquired in Brazil. You're going to look at that differently than, say, the distribution acquisition we did in 2022 when we bought Midway where that's a fold-in. Midway, we were able to leverage existing infrastructure. We brought -- we were able to kind of capture some customers, we were able to bring on some really good sales reps and some really good management from that, but we were able to fold them into our infrastructure, and it becomes almost immediately accretive for you. That's a different approach than when you have to kind of step back and say I'm going to buy this manufacturer of implant products. I'm going to -- this is more strategic, I'm going to look at this, so I'm going to have a longer-term horizon on some of these things. But that is -- if it fits in with our strategic plan, it becomes something that, that is attractive to us, and we still think we're getting a good price, and we're confident we can deliver the returns that we're modeling out and that's what's driving these acquisitions.

And then with regards -- once the acquisitions are brought in, especially on the specialty side, any changes [indiscernible] sales infrastructure and how the sales force is going to market or is it because of penetrating different areas of practitioners that's not necessarily case?

Yes, any changes there would be modest changes, right? It would be more -- you might train up your existing sales force a little more on any unique aspects of the product line of some of these businesses that are coming in which can happen on the implant side. You can't get some uniqueness to product, but it would be restricted to that.

Awesome. Well, we're just about out of time. So Ron, thanks so much for joining us. Thanks, everybody.

Very good. Thank you, Mike.