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

Hi, everyone. My name is Mike Sarcone. I'm an analyst on the U.S. Medical Supplies and Devices team. This is the session for Henry Schein. And with us from the company, we've got Stan Bergman, CEO; we've got Andrea Albertini, who is the CEO of Global Distribution and Technology; and we've also got Graham Stanley, who's IR and the Strategic Financial Project Officer. So gentlemen, thank you for joining us today.

I guess just to kick it off, Stan, you announced your intention to step down from the CEO role towards the end of this year. It's been a long-storied career. You've built up Henry Schein. Just wanted to get your take on how you view Schein's strategic positioning today.

Thank you, Michael. It's great to be with you. I think I've been to many of these conferences of yours, Jefferies conference, and I have to say you guys do a lot of due diligence on our space. So Henry Schein is in a pretty good position today. I announced my retirement in July of this year. I wanted to ensure that there will be no rumors while we were going through the succession process. It's a succession process conducted by the Nominating and Governance Committee of Henry Schein, looking at internal candidates, external candidates, as you would expect in a public company. We're using a national firm to do that. And we expect to -- it's a global firm, and we expect to announce my successor before the year-end. The successor will be in place in January, and there will be an orderly transition. And from a business point of view, we did have a cyber incident in October of 2023, that destabilized us for a period of time, but that's behind us, and the business is back to gaining market share, growing each of our businesses. I think our distribution business, global, and Andrea leads, is the leader in dental consumable distribution and equipment sales and service, probably very few dentists in the developed world that don't do business with us in one way or another in that area, and the business is doing quite well. The markets are relatively stable, leaning positively in the developed world, and that's where we operate. The business is doing well on the distribution side. On the high-growth, high-margin side, we have 2 major business areas. One is in the software area, dental software. Andrea leads that, too. We're the leading provider of dental software. Of course, moving from on-prem to SaaS model is a big opportunity for us. But the big area of opportunity is providing various apps, various value-added services, electronic medical records, claims processing, revenue cycle management, credit card processing, patient financing, all of that tied into the portal. That business is doing quite well. And, of course, AI is very important. We're selling various AI applications, the integration into the electronic medical record of scanning, digital scanning, imaging, et cetera. That's a great business, doing well. And then we have our Specialty Products business, which today focuses on dental implants and bone regeneration products. We're #3 in the world. Endodontics, we're #2 in the world. These are own brands, innovative products, self-made. We also -- so that all accounts for the practice management software and related systems. The Specialty Products each account for about 25% of our operating income. And then, if you add on top of that the own brands, private brand, you may call it that. But today, it's really -- it's a private brand, a Henry Schein brand. It's the largest brand in dentistry, highly regarded in dentistry. That's another 10% of our profits or so. So you got close to 60% of our profits, they're coming from brands that we control and different Henry Schein brand or other kinds of brands. And overall, our business is in pretty good shape. Each one of our business is headed up: on the business side of Andrea, distribution and tech; and then, Tom Popeck, who leads the owned brand businesses. Each one of our businesses today has very good in-depth management. All of our functions have very good management. Lots of succession has occurred over the last few years. And I would say, I'm leaving the business in good shape.

Great. Appreciate the walk-through. And I did want to ask about the state of the dental markets. You mentioned stable...

To leaning positive.

To leaning positive.

And I've said that...

Consistently.

For 35 years -- 30 years as a public company. There's all sorts of dynamics going in the dental business. Some companies are having a problem here. Others, their stocks were too highly valued, stocks went down, but generally, the dental market is a stable market. And the part of the healthcare market that we focus on, the office-based practitioner, moving from procedures from the hospital acute care area to the office, dental office to the ambulatory surgical center to the home, these are all growing areas of the medical markets. And it's not sexy, it's no cure for cancer, but it's all stable markets growing a little bit each year.

All right. Sexy is in the eye of the beholder though. All right.

It's boring.

Okay. But I did want to ask you to dig deeper because I sat in one of your meetings before, and we had some lunch. And you talked about some of the moving pieces that Schein has experienced. So I guess, can you kind of go through the spiel again and talk about Schein's growth when you exclude some of the more volatile components since 2019?

Andrea, that's you.

Yes. So you heard that in Q3, we announced a stable margin, and this is a change mainly driven by the improvement of 2 headwinds we had in earlier quarters. One is the glove prices. For quarters, we saw -- after the rollercoaster of post-COVID, we saw glove pricing -- average selling price declining. And in Q3, finally, we believe went to a stable place and that improved, of course, our margin. The other point is, yes, the -- I would say the -- not only the glove pricing, but in general, the prices were stable, and we believe it will stay like this. We have opportunities to grow prices. We are working on value creation initiative, GP optimization, so we see opportunities to increase our average selling price and our margin. So without giving any future guidance, but we believe stable and with opportunities to improve for the future.

Got it. And without asking for guidance, I guess, what are -- can you delve into a little bit more some of the moving pieces on the distribution side, around the margin drivers?

I mean, there are always short-term fluctuation. You can go from currency exchange to tariff. Of course, it has been some -- we had some turbulence in the last few months. But these are short-term topics. I mentioned, it already in the commodities, like PPE in general, prices that are now more stable. But in general, we believe that we will see a little bit of price gain going forward. But it's also true that when you have commodities, and we -- you don't have any innovation, prices tend to go down. And we use this as an opportunity to shift customers to our own products that, yes, maybe the price is a little bit lower, but we have much better margins. So you shouldn't only look at the price trend, but also the margin because the shift that we are doing on commodities, to our own brands, may determine a small decline in average selling price, but definitely at a better margin. On the equipment, similarly, technology, when there is no innovation, technology tend to have a lower average selling price, and we are seeing this on digital technology. While the adoption of this technology become wider and wider, the price -- the average selling price tends to go down.

Okay. And I did want to ask just -- you've talked about 2025 being a foundational year for achieving your long-term goal of high single, low double EPS growth, and you've made progress on some of the restructuring initiatives, and I guess, when you think about your ability to achieve that EPS growth goal, how important is a normalization in the dental market? I know you've said it's stable, but it is subdued versus kind of growth we've seen in the past. So do you think you can achieve that target just on restructuring and value creation initiatives alone? Or do we need some normalization and dental market growth?

So I think, Michael, I mean, a, yes, so we'll be planning to provide 2026 guidance on our fourth quarter conference call in February. Yes, the markets are maybe a little bit lower at the moment, the dental market, than is the long-term sort of trends in that market. But we are gaining market share. As you saw in our Q3 results, we had strong momentum in most of our businesses, which we expect to continue. So that's a positive for us. To the extent that market growth is a little bit lower, we announced a $200 million net benefit through value creation projects. So that should help fill the gap. And offsetting that to some extent next year, we haven't -- we're still doing the work, yes, but we had a remeasurement gain in the third quarter. We're assessing whether there will be a remeasurement gain next year as well. So again, when we issue our guidance, we'll make it clear what the assumptions are around that. But so overall markets continuing the way they are, steady, but airing to positive. And what's most important for us is us gaining market share within those markets across our portfolio.

But high level, as Graham, Andrea spoke now, the distribution business, it's stable to somewhat leaning positive. We continue to gain market share. We'll move more and more to our own brands, and that will drive up operating income. The software businesses are doing extremely well. The value-added services businesses are doing well. That's going to be a big contributor to profits going forward. And then our own brands in the implants, bone regeneration, endo area, plus our OEM products are all growing nicely with high profits.

I did want to dig into some of the specialty products, and I guess, we could start with implants. You did have a nice quarter there. And I think you've talked about being the #1 share player in Germany. So I guess, how do you think about where the implant portfolio sits today and you're right to gain share in that market?

Yes. So we have 2 levels of implants. Firstly, the premium section, which is the Camlog, BioHorizons lines, very active in Germany and in the U.S., Japan. We're not really in China, so the volatility of China, which is today, a very rapidly growing implant market that's -- we're there, but very small. So on the -- and then, we have the lower end of the pricing. All of these are good implants. We did not have the lower-priced implants available in the U.S. We acquired a company by the name of S.I.N. about 18 months ago, 15 months ago. And now that product offering is available in the U.S. We were in a significant disadvantage working with DSOs, in particular. They were looking for a low-priced product. Our major competitors all had low-priced products. And so now, we have the complete line in the U.S. and can go into our DSO customers that are doing implants, providing implant services and offer them the high end and then the low-priced product. They're all good, by the way. And so that's been key. And in the lower-priced implants, we've not only made the investment in Brazil, but also in France, we're also #1 today. And so we have a complete offering, the premium, the lower price, and that provides real growth opportunity. Also, we rounded out our line in the U.S. on the implant side, and now, can provide a very competitive offering on the premium side to service all needs of implant dentists in the United States. The implant business has a great sales organization, great education, but also leans on the Henry Schein's sales force that has a relationship with dentists, especially those that want to think about doing oral surgery in their practice.

That is helpful. It sounds like from a product portfolio standpoint, you are where you need to be to compete effectively. Are there any particular geographic markets where you feel like you're better positioned for share gain versus not? .

I think we're well positioned throughout the world. There's really no geographic gap per se, other than in the developing world. I mean, we're not really in India in any way. We are very small business in China. But in the developed countries, I think we are well positioned. Are there geographies? It's always. I mean, like in the U.S., we invested in a Midwest distributor 2.5 years ago. Our market share was not as good, but they're all fill-in opportunities throughout. Having said that, I think we can gain the market share we need in all these markets through advancing our sales force organically.

You also talked about the software business. I do want to touch on that. But I do want to ask first, the global e-commerce platform, you've started to roll that out in select markets in Europe. Maybe you can talk about how that initial rollout has progressed in your key learnings? And what we should be looking for, for kind of rollout beyond that?

Sure. The new henryschein.com is a state-of-the-art e-commerce platform, maybe a little bit more than an e-commerce platform because it's what we use to deliver content also to our customer and generate in general, a better customer experience when the customer interact with Henry Schein online. As you correctly said, we rolled it out in U.K. and Ireland, beginning of this year. This is a global project, but we wanted to start in a smaller market than U.S. to have a controlled first launch. And we are now 10 months into the rollout in U.K. and Ireland, and it started to really show great potential. We see improvement on -- both on the revenue side because we are able to generate better revenue, more revenue, but also on the efficiency side because you deal with the customer online, generate a good customer experience, provide all the information the customer needs to do the right choice. So we see more efficiency in our internal processes, including lower return on products. That is, of course, a source of efficiency for us. So yes, we are very positive on the results we are seeing. We started the rollout in the summer in U.S. and Canada. We are doing it intentionally slow because we want to make sure we have enough resources to support our customer during the rollout. Every time you change something for the customer, it's somehow traumatic. You need to help them to understand the new platform. But as soon as they learn how to use it, they are very happy. So the feedback we get is positive.

Got it. I mean, are there opportunities to -- as those customers are interacting online, incorporate like recommendations for additional products, are you seeing benefits from increased sales that way?

Absolutely. You are touching a very good point because one of the more sophisticated tool that we have available with this platform is the ability -- I mean, as a consumer, you are all used to get -- when you buy something to get the suggestion or customers that buy this also buy those or you may want to consider this as an alternative. These are tools that will help us in the dialogue with our customer, but digitally. So it's very helpful.

And you talked about efficiency from a Schein standpoint as well. Is this something that over time could be pretty meaningful in terms of a margin driver?

It definitely help margin twofold. One is when you interact with an online commerce, you don't ask for a discount. When you have a field partner that you know since 20 years, it's easier to ask for an additional discount. This can help. But it's also what we were saying before, the ability to suggest alternative products and maybe replacing or suggesting the customer to buy another product that has better quality, maybe a better margin profile for us. So yes, it will impact margin.

Okay. Great. And I did want to ask about Global Technology. I think you saw some nice growth acceleration there, 9% in 3Q. I guess, what are the drivers of the acceleration? And how should we be thinking about what a sustainable or normalized growth rate is for that business?

I love our technology business because it's -- first of all, it's part of our high growth, high margin profile businesses that we are building more and more. But we also deliver a lot of solutions for our customers. So these are stickier solutions, are solutions that create loyalty because help the practitioner to run a more efficient practice. So we have a core part of the business that is our practice management software. This is growing very well. We are shifting from on-prem to cloud, so more SaaS kind of a business. In the last quarter, we grew very fast on practice management software sales in general, and of course, driven mainly by cloud. But we are also growing on value-added solutions around the practice manager, so we can call it additional app that you put on your platform. And these are really creating value, both for the customer and for us. Just to mention some, Detect AI that help making the diagnosis better when you get an image. It's immediately. When you get an image with a sensor or with a camera, immediately you have AI telling suggesting some of the findings. Forms, we recently launched Forms to digitally do all the process of taking patient information. We have revenue cycle management solutions, including eligibility prod, means having the possibility chairside to inform the patient about what is covered and what is not covered on the treatment plan. We have Reserve with Google, that is a service that allow practitioners to find customers and customer to book online through Google the dental appointment. And we announced recently an interesting partnership with AWS, the Amazon Web Services, to leverage their agentic AI capabilities. They have a very powerful engine on agentic AI that we want to integrate in our practice management software to deliver solutions to our customers, voice solution, like transcribe the dialogue between the practitioner and the patient to create immediately notes, but also a treatment plan and so on. I mean, there are a lot of opportunities, so sustainable opportunity to grow this business high single digits.

Great. And I think with that, we are basically out of time. But, Stan, I wanted to let you close with any kind of comments you'd like, what's underappreciated about the business.

I think everyone -- thank you all. Thanks for being here. Thanks for all the years of interviewing. It's been great. I will say only one thing, the business is very stable. The dental markets are stable. The business has huge opportunity to grow on the distribution side, the value-added side, adding margin. And our BOLD+1 plan, which you can see on the website, is working extremely well. So I'm very optimistic about the business, which has a great management team, and the morale is great.

Great. Well, with that, thank you, everybody, for joining. And gentlemen, thanks for participating today.

Thank you, Michael.

Thank you.