Henry Schein, Inc. ($HSIC)

I run the health care tech and distribution sector here at Bank of America. We are very excited to have the Henry Schein management team here with us. We have CEO, Fred Lowery, and CFO, Ron South. Thank you both for joining us. Really appreciate the time.

Thanks for having us.

Thank you, Allen.

Before we kick off, Fred, I would love to get a sense. Do you have any prepared comments or would you love to make any comments about your first quarter as a public company CEO.

Excellent. Thank you very much. No, it's 2 months in, and things just finished a month 2, and things are off to a good start. We had a good Q1. Really healthy growth in our dental market. Overall, growth was strong in our technology business. Growth was strong in our distribution business. We did see some softness in medical. But when you back out for flu, the underlying performance was actually -- was pretty good, mid-single digits in medical as well. So good start to the year. Margins were good in the quarter. So a nice expansion in margins. We recommitted to our value creation delivery of $125 million run rate net by the end of the year and $200 million over the next several years -- next couple of years on a net basis. And we reconfirmed our guidance for 2026. So off to a good start. Very excited about the opportunities ahead, and I'm sure we'll talk about that during the discussion today.

Yes, absolutely. So Fred, you mentioned you've been in the seat about 2 months. You talked on the call about your 100-day plan. Would love to get a sense from you during your first 60 days or so, as you think about the first 100 days, where are you spending the majority of your time? How should we think about what you're prioritizing during your first 100 days with the company?

Well, first of all, it's really just me learning. It's just me trying to get out and spend time with our customers, spend time with our suppliers, spend time with our employees, our Team Schein members and just suck up as much as I can as a sponge and really evaluate what's going on in the business, assess what's going on in the business, understand the current projects that we have in place which I've gone through that assessment to the point that I'm very happy to commit to our value creation opportunities. And then I think the other part is I'm not just assessing, it's also determining where do we want to invest in the future. Where are the big opportunities, where are the unlocks. And one of those areas is leveraging AI and accelerating our new product development process, accelerating some of the capabilities that we're bringing to market, particularly on the technology business. And so I'm really excited about that. Another opportunity that we're working on is really aligning our commercial processes so that we show up with a customer value proposition that encourages the customer to buy from more than just one part of our company so that we grow together as an overall company and really changing the narrative from focusing on helping customers save money to actually helping customers make more money, helping them grow faster and grow more productively.

And Fred, you mentioned Henry Schein's value creation initiatives. That's a big part of the BOLD+1 strategy to get Henry Schein back to consistent high single-digit to low double-digit EPS growth. On the call last week or 2 weeks ago, you talked about a lot of different ways to improve the operating performance of the company, dynamic pricing, shift to owned brands, specialty growth, centralizing back-office functions. You also mentioned just now AI and aligning some commercial opportunities. Would love to get a sense for you, your first 100 days, as you think about all these different places where Henry Schein could look to create value, are you looking at maybe 1 or 2 and saying, these are the ones that I'm prioritizing? Or are there all these different opportunities going on at the same time? Trying to get a sense of what's prioritized and how you think about the different areas of focus here.

Yes. I mean we're absolutely going to deliver on the value creation items that you listed there. And I think of them more than just an episodic event. I mean we're going to absolutely deliver what we committed to, but the pricing tools that we've put in place now, they will continue to -- we'll continue to benefit from them over time. Our focus on growing our corporate brands. We will continue to do that over a period of time. And the benefit from us creating an outsourced shared service, we'll continue to see that benefit over a period of time as well. And ultimately, my expectation is we'll develop a continuous improvement process where we'll continue to drive productivity for the enterprise, and we'll continue to be able to leverage that productivity to drive growth in the future.

And then for Ron, as we think about the $125 million exit rate in 2026 for operational improvements, can you unpack that a little bit as we think about -- are there specific parts of that where you have very, very high degree of line of sight, maybe you have more confidence in? And then which of those drivers might require a little bit more execution as we think about the confidence level of getting to that $125 million by the end of the year?

Sure, Allen. So as we've mentioned before, the -- that $125 million run rate at the end of the year is the expected net run rate operating income improvement that we would have as we enter 2027. We do expect some benefits in 2026 from these activities, obviously, but those benefits are a little more backloaded to the second half of the year. But that's mostly due to the G&A portion of this because the G&A does require some time, some planning, some transitional planning because there are some structural changes that we're going through in terms of how we support the business from a G&A perspective. And we want those changes to be sustainable. As Fred said, this isn't episodic. We want it to be something that is established so that going forward, as the company grows, we're able to scale this in a way that is able to serve the company without having to add a lot of additional costs as the company grows itself. So there are some structural things we're working through right now, but we'll begin to see a lot of benefit from that in the second half of the year. As opposed to gross profit optimization, that's more of a process that we're going through where we should -- we're beginning to see some benefits from that now. We got a little bit of that in Q1. We're seeing -- I expect we'll continue to see some gross profit improvements in Q2 and as we progress through the year because those are more systematic and anticipatory changes to how can we be pricing products in a more dynamic way. That doesn't necessarily mean just increasing price, but also decreasing price where we can be more competitive and not outliers in certain product categories. So that's -- I think those are areas that require less planning, execution and can provide us with a more immediate benefit. It's the execution that's necessary on the G&A side that begins to give us that savings in the back half of the year. But we feel like we have really a clean line of sight into how we're going to execute on that. And that's what gives us the confidence to commit to that $125 million.

And then taking a look at your businesses, both medical and dental. On the call, you talked about as the quarter went on, it seemed to improve from a demand perspective there. I think you said that March was better than February and April was strong. Would love to get a sense of what you're seeing so far in April and maybe early May as it relates to your guidance. Is there anything surprising you in April or May as it relates to the Dental business specifically, and then I'll follow up on the medical side. But in the Dental business, can you talk about what you're seeing so far in April and May and how it relates to your guide?

No, I would say the momentum we saw in April has continued into May. It is a -- to get the growth that we want to have in dental, it requires us to take market share. It requires us to have -- and taking market share is also a component of that is also maintaining the customers you have, reducing the churn of customers you have, and we've done a very good job of customer retention, and we've been able to continue to take market share. So we're quite happy with the continued momentum we're seeing into the second quarter on the dental side.

And then as we think about the medical business, you called out a weak flu season. And I think the guide assumes that your organic growth in the medical business will accelerate after 1Q. Can you talk about what underpins the confidence or maybe back out what would the growth have been in 1Q ex flu and what you're seeing in the medical business that gives you confidence for the rest of the year?

Certainly. So as we said on the call last week, we estimated that when you take out the impact of point-of-care diagnostic kit sales, which is really those -- the demand for those products is largely driven by the respiratory illness season, whether it be flu or RSV or otherwise. Excluding that product category, our medical business grew in the mid-single digits. And I would -- my expectations for medical, as we progress in the year, there'll be less of an impact of that product category because it does tend to be heavier in Q4, Q1, midyear, not as -- there's typically not as much demand in that product category. So we do expect medical on a reported basis, on an as-reported basis to continue to see that growth that we saw in Q1 ex those diagnostic kits. Some of that is driven not just by core medical, but also by our Home Solutions business, which has been growing quite well for us. We now are getting probably greater than 10% of our medical revenues from our Home Solutions business. It's about a $400 million plus run rate. And it does get better margins. It does grow faster, and it's been a great area of growth for us.

And then last question here really on the end market or macro. There's been some discussion around the derivative impact of oil prices on other -- on input costs, things like resin. Can you remind us what your exposure is to oil-linked inputs and maybe give a little bit of historical context around how rising commodity prices could impact your business?

Yes. It's hard to say. When you have the breadth of products that we sell and the number of SKUs that we sell, and certain product categories may be impacted by -- ultimately from the cost of oil, and they may have some petroleum-based commodity to them in terms of the material that's used in them. But the approach we can take with those types of products is that as we see cost increase to the extent we have to increase prices, we'll have to consider that. The beauty of the broader portfolio is that if we see other products that are not experiencing as much of a cost increase that are similar SKUs, we can redirect customers to those products or to our private label if we have a competing private label product. So we feel like we can work with customers to get them to the products they want and still be at competitive prices. It's very much a very similar approach to what we took during the volatile tariff environment last year. And we were able to mitigate the effect of that over the course of 2025. And we think we can do something similar in 2026 with as it relates to the cost of oil. One other thing I'll add to that is that it does impact to a certain extent, freight prices. The freight prices that we're paying and to the extent we have to increase our freight charges going out, we're working with customers to make sure they understand that if we've had to include some fuel surcharges. But we feel like what we're doing there is still in line with market as we go forward.

Okay. Great. And then I think that one of the highlights of the quarter for us was the gross margin expansion in the distribution part of the business with margins up 35 basis points. Can you unpack the primary drivers of that gross margin improvement? It was really nice to see. And as we think about the durability of those margins, how should we think about the sustainability of gross margin expansion or stability within that distribution part of the business?

Certainly. And I would say that you do see, first of all, some of the beginnings of some benefits from our gross profit optimization initiative that we have in place there. But that would include -- we're seeing some stability in glove prices. I mean, for several years now, we've seen glove pricing coming down, eating into margins a little bit. We do see some stability in glove prices, and that's helping those margins. I would also say that we saw growth in our company-owned brands or private label as being -- exceeding the growth of the overall portfolio. And that group of products does get a better gross margin, and that's also helping us in that area as well. And I do believe these margins can be sustainable going forward, yes.

Okay. Great to hear. And then one for Fred. As we think about your conversations with customers, Henry Schein is the leader in -- with their relationships in DSOs. Would love to get a sense of your initial conversations with those DSO customers. They're obviously utilizing Henry Schein in a variety of ways. What are some of the things that you took away from those conversations where Henry Schein can do more for some of those large and growing customers?

Yes. I've had an opportunity to meet with most of our largest DSOs and some smaller ones as well. And the good news is that they see a lot of value in Henry Schein. And they, to a customer know that there's more that we can do together. And I think the areas of opportunity would be one around our corporate brands and leveraging more of our corporate brands with DSOs. And they have a really great way to drive compliance in those -- in that customer set. The other is around our technology, around our PMS software and the way we're building out the clinical workflows, many DSOs see a lot of value in that and understand that it can help them from a productivity standpoint and actually from a profitability standpoint. So those will be 2 areas where I think there are more opportunities with DSOs for us to work closer together.

I appreciate all of that color there. As we think about the merchandise growth within the dental business, it was a little bit better than we expected in 1Q. It seemed like dynamic pricing was part of that. Good demand was also part of it. Ron, about a year ago, you did some promotional activities that seemed to improve your growth rate in the back half of last year. Can you talk a little bit about the performance of those promotions relative to your expectations, what retention rate has looked like and how that's contributing to growth here in 2026?

No, I would say the promotional activity that we had, and it was largely concentrated in the second quarter last year has really led to those market growth -- I'm sorry, market share expansion that we've been able to have in the second half of '25 and that continued into the first quarter of '26. So we've had great success in working with customers. A lot of these customers were people who were already buying from Henry Schein, but were buying at low volumes. And we really focused on how could we increase share of wallet with those customers and also develop a stronger relationship with them so that they didn't just view us as someone who they could buy merchandise from but also how could we help them drive a more profitable practice. And it has -- I think those promotions have really paid off, and that was clearly a contributor to the market share growth that we had in the first quarter of '26.

Great. And then moving on to specialty. I think both value implants and premium implant growth slowed quarter-over-quarter in the U.S. You spoke a little bit about some timing impacting the softness there. But would love to get a sense of what you're seeing broadly in terms of U.S. growth rates, both in premium and value implants. And you've made some acquisitions there. Would love to get your confidence on growth rates over the remainder of the year and how things like M&A are contributing to that growth.

Sure. So on the specialty side, the segment as a whole had growth of about 8%, but the local internal growth there was 1.7%, which is a number that we feel like will improve as the year progresses. And we did have some timing issues within the quarter that we felt like impacted that growth rate. I can say from an internal perspective, our results in that segment were in line with our expectations. And that's why we made a point to say we do expect that growth rate to improve as the year progresses. In terms of value versus premium, in the U.S., we continue to see better growth in value, both in the market as well as within our product portfolio, better growth in value than in premium. I believe what we're seeing there is more -- any market expansion that is happening in implant tends to be highly concentrated in value. It tends to be coming from GPs who are expanding into doing implant procedures and are doing so using a value implant. So we're excited about the transaction we were able to complete with our SIN U.S. distributor that we now own that distributor in the U.S., and it gives us greater control over that product portfolio. And we expect to be able to continue to drive growth with the value implants going forward. I believe in premium, our BioHorizons brand still competes very well. They are at an attractive price point for a premium implant. And we still feel confident that we can get better growth out of -- on the premium side as the year progresses. Outside of the U.S. and Europe, what we've seen there is that it's been relatively steady growth. Camlog continues to be a very good performer for us in Europe, and we think that can continue.

DSOs have obviously been a big driver of growth in recent years and obviously very important to Henry Schein. As we think about their growth in 2025 and moving into 2026, interest rates have -- they went lower, now they're moving higher. How would you think about the growth rates and the growth outlook for that large customer cohort in '26 versus 2025? Is there any change there? Any moderation, any acceleration? Anything to call out?

I think the DSOs have historically been growing faster than the balance of the market. And I think that the DSOs that we work with, and we have a heavy concentration of the largest DSOs use us as their primary distributor. And we have -- working with a lot of them on not just on what merchandise and equipment are you buying, but also what expansion can you do into, whether it be in specialty, what are some of the tools you can be using in technology. And I think that is why you're seeing greater growth in DSOs than in the balance of the market. And so I think they will continue to -- if they can follow their business plans as they have and they continue to find innovative ways of growing their practices, I think we'll continue to see the DSOs do well beyond 2026.

And then going back to the DSOs again, Fred, you mentioned that some of the opportunities to expand wallet share are corporate brands, and PMS software. Can you talk about your conversations with those DSOs? Where specifically is the opportunity around corporate brands? Are there specific ones where you have 2 DSOs, one that has a larger adoption and so you're kind of comparing the 2 and you see an opportunity with the second one? Would love to get a sense of how you think about this opportunity. And then on the timeline of exploiting that type of opportunity, do you think this is something that could be done relatively quickly? Or is this something that is more iterative and something that you could expand share in over a period of multiple years?

Yes, I'll start with the back part of it. I think it's somewhere -- something that we will expand share over multiple years. It's not something that we're going to see episodic or flip a switch, and we'll get there. I think -- over time, we will continue to grow our relationship with DSOs. And as we do that, we'll see our share position grow in our corporate brands. I don't know that I would want to point to 1 or 2 categories and say, hey, these are the exact places because I think it actually does depend on the specifics of what that DSO is looking for, and there are opportunities in many different categories. But I do -- I will tell you that there is a clear view from DSOs that they absolutely do want to use more of our corporate brands, and they see opportunities to grow as well as we do.

Moving on to digital equipment. In the quarter, sales were flat, and you called out lower ASPs from new entrants, something we've seen for a long period of time. It sounded like toward the end of 2025 that maybe some of the ASPs were stabilizing a little bit, but it sounds like that sort of reversed in 1Q. Would love to get a sense of how quickly is volume growing for digital equipment? And is the -- how material are these lower ASPs? And I guess maybe an update on your thought on when that moderates, if you see any time period where that would be likely?

Yes. I mean you're referencing the intraoral scanners, and we did see volume growth there. I believe it's in kind of the mid-single digits that we saw in volume growth. But a lot of that growth came from a greater demand for some of the lower-priced entrants. So that's the math of that ASP as they get a greater mix of that volume, that's what's bringing that ASP down. But it's a very attractive price point for a lot of practices to -- who are currently not using an intraoral scanner, and there's still a lot of practices out there who have not adopted digital technology who are making these investments for the first time. And so I think that it could still be a little while on that. But think about it as these practices acquire a scanner and begin using a scanner and understanding the benefits they're getting from that digital technology, they also become candidates to buy additional digital equipment that interacts with that scanner. So while there is some pricing pressure and what it might create when you look at overall revenues on digital products, it does provide us with some growth opportunities down the road as these practices begin to become more of a digital practice as opposed to an analog practice.

And then with a few minutes left here, moving on to capital deployment and capital allocation. You've been very acquisitive over a period of many years across a lot of different areas, specialty, medical and things like geographic expansion. As you think about your portfolio today, where is the most attractive areas where you're focusing on for M&A?

Well, any M&A we do will continue to get a lot of scrutiny. We want to maintain a very disciplined approach on M&A. Our focus will likely continue to be more in what we have coined as the high-growth, high-margin areas of the business, specialty products, technology, value-added services. I would say, in addition to that, we've done a fair amount of acquisitions in the Home Solutions area over the last couple of years. We still like the opportunities there. We still believe we can do some fold-ins in Home Solutions. That is an area that while it might not qualify under our definition of high growth, high margin, it is higher growth and higher margin than our core medical business. So it is accretive to that piece of the business. And so we do see some opportunities within medical in that area as well.

And then your organic growth in the first quarter was about 2.5%. It's a little bit below the Street. I think the expectation from the Street now is that growth -- organic growth reaccelerates to maybe 3.5% for the last 3 quarters of the year. You talked about some of the growth drivers in the business that should improve. But can you speak to your degree of confidence that growth can reaccelerate for the remainder of the year?

Yes, because I don't think we're going to see the same headwinds in medical and in specialty that we saw in Q1. I think those were items that really kind of brought down that internal growth number. We expect that internal growth number to be better as the year progresses.

And then one follow-up here on the SIN business. You bought that business in 2023. And then you bought SIN 360 very recently. Was that always part of the internal plan? Or did something evolve there where that became more attractive? Would love to just get a sense of -- is this sort of the future road map, but any thoughts you have there would be helpful.

Yes. I would say it was clearly an opportunity that we saw as part of the acquisition of SIN in Brazil. We knew that they had the SIN U.S. distributor. It was a relatively new business. We had to work out, quite frankly, how well we could integrate it with our BioHorizons business, how would we go to market with those 2 businesses together once we kind of formulated that plan and began to see the opportunity in value implants and made the investment decision quite easy.

And then with the last 90 to 100 seconds here, Fred, you've been in the role for 2 months. As you think about your goals for the next year, what are the signposts -- or how are you going to be grading yourself a year from now to make Henry Schein or your tenure at Henry Schein a success after that 1-year point?

Well, I think it starts with us delivering on our guidance for our commitments for 2026. That will be clearly one thing and also delivering on the value creation items. But aside from that, it's really about us having a clear view of the actions that we can take to accelerate growth and do it more profitably. And as we develop that strategy, which will be an extension of our BOLD+1 strategy, I'm sure, if we -- if I can look back and say we've got a clear line of sight to doing that, I'd say it would have been a successful year.

Sounds good. I think we'll leave it there. Fred, Ron, thank you very much for the time. Really appreciate it, and thank you to everyone in the audience for joining us.

Great. Thank you very much.