Henry Schein (HSIC) Earnings Call Transcript & Summary

Why don't we get started here? So I'm Jason Bednar. I cover med tech here at Piper. Next fireside chat is with Henry Schein. Very happy to have with us today a pretty large group. We've got Schein's Chairman and CEO, Stanley Bergman; CFO, Ron South at the end; as well as CEO of Global Distribution and Technology, Andrea Albertini, and then also CEO of Henry Schein Products Group, Tom Popeck. So thanks a lot for being here all of you. Always it feels spoiled just having the 4 of you here with me.

But why don't we get straight into Q&A. Stan, I've got to start with you. You are one of a kind. It's really uncommon to have such consistent leadership of a public company with a commitment to a long-term strategy like we've seen from for your time at Henry Schein. It doesn't seem real that this might be your last investor conference. It's maybe not a fair question. But as you look back on your career or even the last 5 to 10 years, what can you say you're most proud of that you and the organization have accomplished?

First of all, Jason, it's good to be here. The unusual part is that related to the fact that I take a lot of words to respond to a question.

You have 30 seconds.

I would say, if you ask me the 5 years, because I think that's important. The 5 years began with COVID, right, in February of 2020. So that was really a roller coaster. First, the dental business was down, shut, medical business, then it opened up, and we had huge amounts of PPE sales and test sales. Then that stabilized. People stopped going to the dentist, and they came back, then there was a backlog. And then we had about 3 normal quarters in '22 -- '23, sorry. And then in October '23, we had the cyber incident. The good news is we had all of our backups. We did everything right. We didn't have to pay to get data back or you ran some stuff, but it took a while to get everything working. And we have competitors that, of course, you would expect went into our accounts since we can trust Henry Schein, blah, blah, blah. And it took us a period of time to recover from that until maybe the last 3 quarters or so when things stabilize now and our sales organization, Andrea can talk about that went out and started being aggressive and getting business back. So that was the 5-year story. But in that 5-year story, we advanced our BOLD+1 initiative with significant success in diversifying the income of the business towards what we call high-growth, high-margin products and services, which is now about half of the profits of the business. And there's another 10% or so, which is our own brands, OEM products. So now we've gone from about 30-ish to almost double that in terms of profits, products and services that have Henry Schein control with our own brand. In that period of time, we reorganized the business such that Andrea took responsibility for global distribution and our software businesses and value-added services and Tom for Henry Schein owned products, which are products that we manufacture ourselves and sell under our own brands, plus our Henry Schein OEM branded products. This is quite significant. And in this period of time, of course, we've taken up our EBITDA very nicely.

All right. It's been a great run to watch from the sidelines but also being involved in knowing you. Kind of a nice segue here, too, as we think about who's going to be the next CEO of Henry Schein. I know the Board is conducting a very deliberate search. You're part of that search process, the interview process. One thing I feel like I've picked up just in all of our conversations is that it seems very likely a new leader is going to be announced before year-end. Is it safe to say then that we're down to the last few candidates for that position?

I can't really comment on the succession process. That's something that as a public company, we have to, of course, we have to respect that. But I think the Board has taken this very, very seriously, internal candidates, external candidates. I will say that if it's internal, we've got great candidates. Our succession plan has been a good one, I think. And then if it's external, we have a great management team that is committed to advancing the strategic plan and the business. So I think we've got -- the company is in good shape financially, strategically and from a management point of view.

All right. All right. Fair enough. Other recent topic here from the most recent quarter and Stan around, feel free to respond. KKR, it started with a 12% stake, I think they took it to 15%. They now can go to 20% ownership. Maybe can you tell -- talk to us about the most recent development, how this came about? Who approached who? Why is 20% the right new ownership level for KKR?

Who approached who? I have to go back to 3 or 4 years, 3 years ago when KKR visited us. They are very interested in the dental space. They have assets in the dental space. They know the dental space. And they're very optimistic about the future of the dental space. So they realized the stock price was pretty good and they invested up 10%, I think, the first time around. And then they came and they said to us, we'd like to invest more. And we reached an understanding that they would be able to purchase about 2.5% in the open market, and we would sell them 2.5% at the price on the day we closed when it goes into the arrangement with them, which was January of last year -- I believe. January of this year. It's been a great arrangement that we've got added 2 people to our Board. One, Max is somebody that understands health care. He's been with KKR understands their culture, is committed to our culture. He's been with them for a long time and runs the health care practice and in North America. And Dan, who was with Danaher during a period when Danaher's dental business was a bit rocky. We had some tension at that time, and he came in and resolved that he became great partners to the point that when Larry Culp left, Dan took over the dental portfolio, did a great job with us. They spun the business. He understands the dental business and he understands distribution and manufacturing. So that's been a great -- that added a lot to our Board. Our Board I think is quite good in any event, quite a lot of experienced people, from different walks of life. And they've added, as I said, a lot to the Henry Schein's story, and they're very committed. Obviously, they must think the price of the stock is pretty good. Otherwise, they wouldn't be invested.

It's very fair.

I'm not telling you anything now because an FD issue, but they don't buy. I don't think they buy assets that are overvalued.

Sure. Andrea, I want to maybe pivot over to kind of the current state of the dental market. We also talk about the medical market, too, but I know a lot of investors focus on your dental business. So if we look at the current state of the market, we were all walking around the Greater New York Dental meeting yesterday. It felt like the general buy and feel was market is still fairly stable, not really inflecting higher or lower. Is that a fair characterization? And the follow-up to that would be, what's it going -- if stable. We think it's stable. What's it going to take to be stable plus or be on that positive trajectory higher?

I think the saying that the market is stable is a fair assessment. We call it stable plus. But yes, the patient traffic is stable, and this is one of the characteristics of our market. We see some pockets of growth in specialties, in other areas. But in general, we see an opportunity for Henry Schein to grow and grab market share. We did it in Q3. We showed a good growth, the highest we had in many, many quarters. And we believe this is something we will continue to sustain because one of the main topic is that after the cyber incident, we had to focus on recovering and discussing with our customers what happened and asking them to come back that we were okay. And this is behind us now. All the focus of our team now is supporting our customers, developing a better business, being more efficient, finding solution to the problem they have. And this is what brought us development in the past and is what is bringing us development now. So we had a good quarter, and we are in a good trajectory that we believe will be sustained.

Right. That's fair.

Andrea and Tom, I'd love to hear your thoughts as well. We look across the dental industry here just from the most recent third quarter, and it sure seems like there's some benefit that's materializing from better pricing. And it seems largely tied to pass-through from tariffs. It seems like also like that right now, that's going to be durable. So feel free to disagree with me on that. But is that -- where do you think we stand on pricing within the industry? How are you seeing your business evolve both with respect to branded and private label products?

You want me to start? So tariffs are there, we believe are there to stay. Finally, we don't talk any more about tariffs, but it's good. We don't believe they had a crazy impact on the pricing. But yes, there was some prices -- some price inflation was there. What does it mean? Is it stable? Yes, we believe it is stable. And it clearly generated also some dynamic shift from product that became too expensive to alternative products. And we have the opportunity to support our customers we have a broad portfolio of branded, but also our private brands that quite often represent a good alternative at the same quality at a lower price. So it helps to mitigate the tariff impact on our customers. So we see this dynamic, nothing exaggerate, but we see this dynamic, and we believe it's going to stay.

What do you think Tom?

Yes. I mean we -- tariffs have been a challenge, obviously, for our own products, but we've been doing a lot of different things to mitigate the risks, right, moving manufacturing, changing suppliers, going to different countries, working with consultants on how to best mitigate all of that. And some of it includes price increases. Like Andrea said, we don't see it going away. As long as the government stable and not changing them too often, I think our plan in place and going to continue the way it is.

All right. Ron, I've got to bring you in, even though you tried to sit as far away from me as possible. Take us through some of the moving parts. I know we're not getting guidance here. That's not what I'm asking. But how are you thinking about just the structure of like what influences your view on 2026? I think you've been clear there are, again, a lot of moving parts to consider. You've got a commitment to getting the business back to high single, low double-digit earnings growth in the future. The Street isn't fully there for next year. So what do you think are missing? Or are they not anything right now?

Well, I think when -- as we look at '26 and as we begin to prepare guidance for '26, there's the -- what I'll call the external issues or the macro issues that we're analyzing, whether it be market growth in the dental industry, what's happening in the pocket of medical in which we operate, what kind of momentum are we seeing both in the market as well as in our own business as we get through Q3 and Q4. In Q3, we felt like we had a lot of success taking some market share. How well are we making that stick? How much momentum are we getting as a business with those market share gains. So that's kind of -- that's going to be a key part, obviously, of our '26 guidance. You layer in some of the other company-specific things, for example, what kind of net benefit do we think we can get in 2026 from the value creation initiatives. There's going to be -- we've talked about this in the prepared remarks last month that over the next few years, we expect about $200 million plus in operating income improvements coming from these initiatives. But in 2026, it's going to require perhaps some investment as we work towards that, but we do think we'll have a net benefit in '26. So how much will that net benefit be or what will be the right range for us to consider in our guidance. And that's something that between now and the end of February, when we provide that guidance, we'll be trying to determine.

One follow-up on that, just on the last thing you said. So net benefit -- we should all be thinking of net benefit from that $200 million in value creation. $200 million is not for 2026, but still a net benefit for the year. And that comes on top of net benefit that you're also picking up a little bit from the restructuring activities taking place in this calendar year.

That's right. So we initiated a restructuring plan in the summer of '24. We've largely executed on a lot of the original thoughts coming from that plan. But there's some overlap with what we're seeing with the value creation initiatives. So what we disclosed in the -- in our filings for the third quarter was that of our intent to extend these restructuring plans so that we can capture some of the restructuring costs and report those out accordingly that come from these value creation initiatives. So yes, it is incremental to the savings that we have achieved through the restructuring plan that we initiated in the summer of '24.

Okay. Perfect. Tom and Andrea, I'll come back to you. As we think about some of Henry Schein specialty franchises, the higher-margin categories, I think the goal is now to get over half of EBIT from these -- or we think maybe now we're even pushing like 60% if we push them both together, the own brand and also the specialty and technology. So is this something that you think you can do organically? Is that the intent? Do you have to do anything inorganically to get there? Tom has got this one.

Yes, for sure.

You've got anyways the point.

Yes. It changed my life. But we're doing a lot. So between new products and sales initiatives and growing the business, I think the business grew mid-single digits in Q3. We're -- we also have value creation, and there's a lot going on there. We've been doing this before we start officially started the project. So as you know, our businesses have been made up of a lot of smaller acquisitions. And we've been consolidating and integrating and making those businesses more efficient, making them run more like one business versus all multiple businesses all over the place. I think overall, with technology, we're somewhere around 45%. And there's no reason in the next couple of years that even could be approaching 50%.

Okay. Is your response where you started with the value creation initiatives, is that -- should we interpret that as you have a disproportionate amount of those value creation initiatives targeted at?

I wouldn't say that. I would say because we've already done a lot of them. So I think it's pretty equal.

Okay. Okay. Fair enough. All right. Shifting gears. Another item that's been pretty relevant here of late, and Stan, I know you probably have some opinions. You have relationships, both with manufacturers and then also DSOs, a lot of discussion. It might be a leading question, but are things healthy and constructive right now in the industry?

I would say with the manufacturers, it seems to be quite stable right now. There's one that's just going through significant leadership change. But I would say our relationships generally are very good with the large manufacturers. The smaller ones have always been good. But the larger ones that had a lot of change. I think they've settled down. Yesterday, we met a whole bunch of them together with Stephanie, who head up our relationships with our suppliers. And the room seem pretty good. I mean everybody is anxious to get business. They all understand that Henry Schein is the way to bring their products to market because we're not just buying products and selling, but their products are part of a general solution to helping practitioners operate the business more efficiently so that they can provide better clinical care. So they understand all of that. The one that's going through transition, not terrible. It's a good relationship, but they're feeling their way through. And I would say that's good. With the DSOs, it's generally good, I would say. I don't remember since the DSO movement started in the early '90s with any DSO saying, wow, thanks for the good pricing. They add us every single one guy singe minute. So one guy got a box of gloves at a better price, they all come. So that's the way it is. And then we have to go and explain to them the best solutions for them, more to our own brands and look at this anesthetic, look at that, look at this gloved, look at that. And oh, by the way, isn't our software helping you? And aren't we helping you with all of our own brand products that we manufacture, the specialty products. We have better training than anyone else that's focused on DSO. So we have a team that works necessarily as constant wins. And of course, you're going to have occasional losses. But I think overall, it's not worse than it's ever been. And we will only do business with DSOs and we can make good profit.

One in particular that I know is on a lot of investors' mind is Heartland just because it is the largest. You've had a long relationship with Heartland. I want to ask you prognosticate on how that RFP process is going to play out. But when do you think we hear a finalization of that process?

You won't hear it from us. You may hear it from them. We don't announce renewals. We stopped doing that about 8, 9, 10 years ago. So if they want to issue a press release either way, that's fine. But we generally don't comment on our customers' particular renewals where all part of the business has been lost. But I will say that we are comfortable with our profitability in the business, and that's key. We're not going to compromise our profitability. We have to make a living. We've got better assets in this space than anyone else. There's no one, I believe that could come anywhere close to national equipment sales and service with the turnaround that we have. And I'm not talking about the U.S. only. I'm talking about all the markets. We just came back from Germany. And yes, there's dealers in every little part distributors in Germany, but there's no one you can call and say, "I have a DSO in Stuttgart and one have one in Frankfurt" [indiscernible] this afternoon. Our services are credible, and we're doing very good work on driving the profitability of that. So Henry Schein is not consumables, not equipment, it's not software. It's a complete solution. The solutions are advancing, and I believe the DSOs generally understand a lot of it. And Andrea, if you want to add to that business this is your world.

You covered it. I mean it doesn't mean they don't beat us on prices every day because it's their job. But they also recognize that we have a full portfolio of solutions, and we are a reliable partner, and this allow us to have the majority of the DSO. That said, every single dealer is own in store.

Yes. I want to touch on dental equipment as well. We talked about it here yesterday. There was a lot of confidence. I thought from the most recent conference call that equipment is going to grow in the fourth quarter, felt pretty good yesterday, just the overall commentary around the equipment market at the trade show. So I guess what's driving that? It's almost counterintuitive with the macro is still a little choppy. Interest rates are fine. But I mean, what's driving that better equipment or call it, just overall equipment growth when we have the backdrop that we do?

Okay. So the overall economy, if there is an impact is more on the traditional equipment. I mean similarly to all of us, if you have to change your car, it's not a good moment, you postpone it 1 year. This can happen. But still, new practices are opening and they need equipment. And then for the existing practices, the focus is more on what helps to drive efficiency. There are a lot of solutions today that help running a better practice. Think about digital workflow, digital imaging, intraoral scanning, 3D printing. And this is where we see the majority of the growth. And we expect this to continue because a lot of dentists still don't have these digital solutions. And they will need it because you cannot be efficient today without going into the digital world. So we expect the digital trend to continue. Yes, there will be some, let's say price decline, average selling price decline as with all the technology that tend to mature. But the volume growth will compensate for it and give us growth.

Okay. Perfect. Well, we have 30 seconds, Stan, I'm to give you the last one. So we really only have 30 seconds this time. So when we think about -- you're going to be in the Chairman's seat presumably for 2026 in the years ahead. What has you most excited? What should we keep people be focused on most for 2026?

I think it's the clinical solution to operating a more efficient practice for the practitioner can provide better clinical care. There are so many APIs and devices out there. We are the ones bringing them together with our Henry Schein One solutions at the center of that. It is -- so every day, I mean, what AWS came to us, we didn't go to them, they came to us. Google come to us. We are the address in dentistry to bring all this stuff together. It is very, very exciting. And it actually connects...

Excellent. I did...

And go everywhere else, and you'll see people selling devices. But devices without connecting is like the railroad without the tracks working.

Great analogy. Well, with that, we are out of time. Gentlemen, thanks so much for joining us today. I really appreciate having you here. Thank you.

Thank you, Jason.