Good morning, good afternoon, everyone. Jon Block with Stifel. Really happy to have Henry Schein with us, and to my right, Stanley Bergman, Chairman and CEO, Ron South, Senior Vice President and Chief Financial Officer, and Graham Stanley, in the audience, Vice President, Investor Relations and Strategic Financial Project Officer. I was just telling the guys, we've got 30 minutes to figure it all out. A lot to hit on and a lot going on. I'm gonna actually start with the quarter and the core business 'cause it's funny, everyone was so focused on the website and cybersecurity, that I think what got lost in there was a Q3 that actually was a little bit stronger than people had anticipated. So let me go through a couple metrics. You hit the Q3 2023 EPS consensus. I think it was $1.32.
Other dental companies missed Q3, top and bottom line, and, you know, your revision to the 2023 core EPS was modest, just about a nickel and a lot less than, again, your dental peers. So, you know, Stanley or Ron, maybe if you just wanna talk about the margin preservation in the quarter. Seemed impressive, flattish EBIT margins year-over-year, despite revenues falling off late in the quarter. How were you able to achieve that, and how were you able to keep the core number more intact for 2023 relative to some of the other dental companies?
This sounds like a very mathematical question. Ron?
I get the math questions.
You want the concepts, I'll respond.
All good. We'll hit on both.
Jon, I think that when you look at, and I, you know, I don't wanna start off by talking about our peers, but when you look at the scope of their operations and what impacted them, it was some areas such as, in some of the specialty areas, such as implants, I believe, and high-tech equipment. And those are areas that perhaps have had a little more volatility recently. And we steered towards the lower end of our guidance before taking any effect of the cybersecurity incident, largely driven by some of those same things, right? But the breadth of our business is such is so much wider than some of the others, when you take into account just the you know, the absolute size of our distribution business.
We have a technology business. We're not just a dental business; we have a very healthy medical distribution business as well. That all of that really, I think, gives us t hat diversification helps us weather through when there is pockets of softness in areas that perhaps impact some of the others in the industry more so than us.
Okay. And I guess that plays a little bit into that sort of more defensive dental narrative that we called out in the recent upgrade in terms of, because of your diversification and, and-
Absolutely
really broad portfolio.
Yes.
I'll go one more math-oriented, and then I'll zoom out a little bit. But, you know, I went back, and you look at the high single digit to low double-digit operating income growth that's embedded in the long-term model, and I went back to your Analyst Day, and you talked about top line of 6%-8%, which was really robust. It was a little less, you know, about 150 basis points less than that when you strip out M&A.
But here you held the line on margins with only sort of 1% growth, normalized for PPE, COVID. So, you know, Ron, what, what do you need from a top-line perspective to get that margin expansion that would allow you to march to, you know, what you've laid out in your long-term plan?
Likely, the most important part of that, of that top-line expansion would be the components of that growth. And by that, what I mean is, to the extent that the specialty businesses and our technology businesses are, that that pace of growth exceeds that of distribution, it gives us, just through the, you know, we're talking about math, just through the math, really gives us that margin expansion that we're looking for. So as our specialty businesses grow and our technology business grow and take on a, If you view that revenue circle and that, that pie, that piece of the pie that comes from them, we'll see that margin expansion continue, that we're hoping for.
That goes to the margin of the 40% of EBIT that you've talked about-
Yes
coming from those businesses.
Right. So the goal is to advance our high-growth, high-margin businesses, which the goal of 40%. But then you also have our own corporate brands, which are about 9.5% of our sales. And you add that up, and you're approaching just under 50% of our profits that are in higher growth, high-margin areas.
Okay. And I'll, you know, stick with that particular talk track, and then I'll work back to some other topics. But, you know, Stanley, it was a very big year for acquisitions for you guys. And some of that was certainly focused on dental specialties and implants. I don't wanna call them holes, but do you, y ou know, were those big step forwards, and are there any other areas that you want to really address and bulk up, or is it a little bit more augmenting and niche going forward?
Well, our goal is to expand our specialty businesses.
Yep.
The two acquisitions that we made, the two major ones in implants, one was to expand our presence in France. We had a very low market share, and we believe Biotech is the largest provider of implants in that market. We didn't really have an implant offering in Brazil. We have very good distribution business, but very small implant sales. We expanded into Brazil with the implants, but more important, we needed for the United States a lower-priced implant specifically for DSOs, and the acquisition of the business in Brazil helped give us good presence in Brazil for implants, but also, perhaps even more important, a low-priced, high-quality implant for the U.S.
I think there are more of those opportunities, although we're not focused right now on acquiring more of those kinds of businesses, because we'd like to finish the integration here. The other area of enormous interest is to expand our presence in the home care products arena. We believe procedures are moving out of the hospital, into the alternate care setting, the ASC area, and the home care. And we want to follow the patients, and so we expanded quite a bit into the home care area, made some important investments there. And then there's all the other value-added services that we-- there's a lot of those that we feel we can add to. And then, we wanna enter into some specialty medical product areas. We've mentioned that before.
We have a smallish size orthopedic business, but quite profitable, and we want to add to that.
Okay.
I'm not saying we're gonna necessarily make big acquisitions now, because we've got a lot to integrate, $1 billion. The $1 billion of capital that we put to work, but there are opportunities.
And maybe let's stick with some of those recent acquisitions. I know they've only been fully under your umbrella for a short period of time, but how are they performing? I mean, you know, if we sort of talk about some of those acquisitions over the past several months, how are they performing? And then, Ron, to take it back over to you, I think at the time of the acquisition, I believe each of the three main deals that you did were expected to be accretive to 2024. You know, is that still the plan? And if you can detail even to maybe what extent?
Right. So the two implant businesses are performing well in their home markets, namely Brazil and France. The home care businesses, we'd only closed recently on the big one. For the period that we've owned the business, it's done quite well. We believe we have a very good management team in the home care area to advance the variety of products that we'll be offering, and I think those are doing well. And then, the big service value-added service business we bought, which is LPS, focused on the large group practices, so those are doing okay.
Okay.
I would say, you know, Jon, the operating income growth, we'll definitely get some operating income growth next year from these transactions. From an EPS standpoint, the additional interest expense will neutralize that somewhat, but it will, I think we're still gonna get some accretion. We still expect to get some accretion out of these transactions in 2024, but especially on the operating income side. But, you know, the additional interest expense does put a little bit of pressure on that, but we do expect accretion in 2024 on those.
For specific to EPS, even with the higher, the higher interest expense?
That's right.
Okay.
That's right.
And that's probably a good segue to go over to capital deployment. So, you know, in 2023, you did a lot of deals. You've got some higher interest expense, Ron, that we saw hit the P&L, you know, in the Q3. We should probably all be thinking about what that means for numbers in 2024. You're also buying back stock, but you're buying back stock at, you know, $75, and then you had the unfortunate situation with cybersecurity. So you're sitting with the stock, even with the recent move, it's sort of, you know, 10% below where you were buying it back. Stanley, there's still interesting deals to be done out there, right? And now there's some debt that arguably, you know, maybe you could go ahead and try to pay down.
It's a really interesting time for a solid free cash flow company such as yourselves. How do you sort of allocate and figure out where you want to go from a cap deployment perspective?
Well, leading into 2023, a typical year for us from M&A would have been, you know, $300 million-$400 million a year. We've always made it clear the $400 million didn't necessarily represent a cap- for us, but that was just the historical run rate for us. We had a balance sheet that allowed us the wiggle room that we wanted to take advantage of some of the opportunities that we identified for 2023. And as a result, we did take on the more debt, and we did do.
We've now committed to approximately $1 billion in acquisitions, you know, for the full year. My assumption at this point is that, and as Stanley mentioned earlier, we need to work on integrating some of these businesses a little bit. I think the management capacity to try to go out there and do another $1 billion next year might be a little limited.
So my expectation is, while we still want to be opportunistic with M&A, we'll likely return to, to something that's more in lines with the historical trend coming into 2023. In terms of share buybacks, share repurchases, we have continued those throughout, 2023. We plan to continue those at a level that would be, consistent with that historical trend, as well. Meaning that typically, that has been also in the $300 million-$400 million range as well, and we do plan to continue with that, you know, going into 2024.
Okay. Stanley, let's talk about patient trends, 'cause I, you know, you talked a lot about it on the earnings call. I thought some of it may have differed from some of the manufacturers. So dental was weak in the Q3, more notably, it seems, on the exit. But when you talked a little bit about it, you said, "Look, you know, our, our PPE business did really well." I thought, correct me if I'm wrong, you attributed some of that weakness to COVID flu cancellations. I thought some of the other dental peers were more structural in nature, right? i n terms of what's going. So can you put those two... Is it, is it more a function of COVID flu and things will subside, or do you see more structural issues on the horizon?
Yeah. It's hard to pinpoint this, Jon. We're talking about hundreds of basis points.
Yep.
But it is clear that in September, patient traffic went down into October. Some of it traditional flu, but I think COVID picked up. We saw it in our COVID sales. So I think that put a damper on cancellations of visits to dental offices. It's hard to see whether that's gonna trend forward, but also clear that on some of the more expensive specialty products, dentists are trading down to lower price products, so implants in particular. So implants are a nice business for us, but it doesn't carry as much weight as perhaps some of the other public companies in the dental space.
But as we think about long term and that trade down, you feel with your enhanced dental implant portfolio, that positions you well to maybe go ahead and capture some of that?
Yeah. I mean, we have branded implants at the top end, but we sell those at a slightly lower price than maybe some of the other manufacturers in that space. So we are relatively well positioned. We also have a decent pipeline of new products on the premium end. And the economy side, we're very well positioned with Medentis, and now hopefully the SIN business we acquired in Brazil will help us in that area. And I would say the French business we acquired also has a good price product. So I think our portfolio is very good if you include some of the R&D that's gonna be coming to market in 2024. So we're quite happy with our portfolio.
To push a little bit, is it fair to say, after hearing your comments, that maybe you have a slightly more upbeat view of dental versus some of the dental manufacturers, that again seem to be leaning into structural, or we'll see the way the Q4 shapes up?
It's really hard to tell. Our equipment business seems to be okay. We had a bit of delays because of our incident in installation. It was working, but the systems were working, certainly taking care of all calls with respect to repairs, maintenance. We may be delayed a little bit on the installation of equipment. I'm not sure if it's gonna impact our December numbers, obviously, but I think our equipment business is in pretty good shape. The backlog looks good. We said it on the call. So, if that's a bellwether, certainly traditional equipment, it's selling in the mid-single digits region.
Not a lot of inflation in there. Inflation was the previous year. So that's pretty good, and we're selling a lot of digital equipment, although at a lower price.
Yep.
So practitioners are investing, and if you take a look at the software businesses, the AI systems are selling. So it's not as if dentists are negative about their practices, but, you know, to calibrate within 100, a couple of 100 basis points is not so easy.
Tough, tough to do.
Okay. I wanna spend a, you know, a little bit of time on the website, and then I'll sort of go into the numbers and geek out a little around 2024 a little bit, Ron, and pull you in. On the website, on Monday's earnings call, you said the website would be back up and running the next day. We're doing what we can on our end. We believe the U.S. site went back up on Tuesday morning. I believe the U.K. went up this morning
That's right
But I think Germany and Spain are still down.
Well-
Is that correct? Maybe let's just start there.
Yeah. Firstly, the U.S. and Canada went up yesterday, and the U.K. Canada seems to be the, they're all, the website is working, seems to be good, and, Europe will come up, probably most of it will come up this week. Not sure if the French website will go back, but we have an alternate website that works. But we're more or less, I would say, within a week or so away from the websites being up and running, and a huge part of our business goes to the website.
Just to be clear, you know, I mean, you never said, even on the earnings call, that it'd be a light switch and everything comes up on Tuesday. You were sort of saying, within a week, you thought it would broadly be up and expand to the-
Yeah
Controlled substances, stuff that you had to be a little bit more careful about. Is that still the thought, Stanley, that, you know-
Yeah
After that week, you're broadly up and running across the different regions?
Yeah. I mean, there may be isolated. I mentioned France. We have already a website that works. It's the old website. We brought it up. The new one will probably be another week or so. Controlled substances, we are able to ship, and we have, hopefully, the full functionality this week. But we're very, very cautious, obviously, in that area.
Okay. Let's talk a little bit about, you know, U.S. and Canada. That's been up since, as you mentioned, Tuesday morning. I mean, I know we're sitting here, and it's not, you know, a ton of time has passed, but has everything gone according to plan, right?
You gotta put it up, and then you gotta go ahead and see the orders come through, and everything's gotta work pretty seamlessly.
Yeah. I'm not gonna say that a day makes a trend.
Yep.
I think even Wall Street would agree with that, although Wall Street can take a day and make a trend out of it. But yesterday, we had a very good production day. It seems to be working. We're quite confident we'll have our promotions back on the street very soon. We just wanted to wait a day or two to make sure that everything's working, but as of an hour ago, things seem to be working very well, wherever the websites are.
Okay. And how about the level of confidence that, y ou know, it's very—it's gonna be very different ordering patterns than what Henry Schein's used to, right? And you're gonna sort of have a bolus of orders, hopefully, that come online over the next, I don't know, seven, 10, 14 days. So Stanley, just your comfort, conviction that the organization can pivot and handle that different work, the different order flow that likely comes through the website?
Yeah, You know, we have not had an issue with actually shipping product once we got the order into the system. That works very well. You know, our infrastructure is very, very good. Because we had a website sit, and the website was down, we had to rely on our field representatives to enter the orders into the computer, and our telesales people to do that. So, there was a little bit of extra waiting time, some days for telesales. Although, I have to say that the COVID period, when we got all these customers calling us for masks and gloves, that was very good dress rehearsal.
It was a good fire drill?
Yeah.
Yep.
I'm happy with the way the team has performed. There may be a couple of countries that have had challenges, smaller countries, but the bulk of Henry Schein handled the entire order processing pretty well. We had problems in a couple of countries bringing our procurement systems back, but we were able to get through that through manual systems. And basically, from a customer point of view, it's working, and it has been working really for a couple of weeks.
Okay.
We were taking orders on the Monday after the incident.
So that last point, I just want to level set for everyone. We did some checks, and we did our own work, but it seems like a dental practice might order, you know, through the website, maybe roughly every two weeks, and you weren't down for even a month. And how much inventory are they carrying at that practice? Like, I'm just trying to figure out for people who think, "Oh my gosh, I had a horrible experience," and they're going to Benco, or they're going to Patterson. Like, the average practice probably only ran into this issue, what? One time, one time and change in terms of how frequently they're ordering?
You know-
Can you help us with the-
For the bulk of our customers, this was not really a big issue. I mean, some DSOs have specific ways in which they order, and maybe for a week or so, we didn't have the workaround or the manual system for them. But you know, in healthcare, unfortunately, practically every one of our customers has either been impacted or knows somebody, and so they were very, very supportive. So were our suppliers. But there's a part of our business that involves, you know, kind of impulse shopping, if you want to call it.
So we're not really marketing in that area, and now that the website is up, we'll have a lot more of this impulse shopping and social media shopping, and various kinds of promotions that will attract customers that are more spotty customers but buy something every month.
Yep. So you can go ahead and bring it back online.
We're not talking about months. I think this is... the next month or so, we should be getting closer to where we were at our systems.
That's probably a good segue, Ron. Let me go through some, some numbers, and, you know, a little tough to do up here, but let's give it a shot. For 2023, you lowered the top line from, I'm gonna do midpoints, 2% growth to a 2% decline. And you said the step down was primarily due to the cybersecurity incident, and these are my numbers. So if I say primarily, if I say, "Hey, look, three of the 400 pips of the lowering was due to cybersecurity," you sort of get about $380 million in lost sales impact from cybersecurity. Maybe I'll pause it. Fair?
No, that it, it's definitely fair. I mean, we've run multiple scenarios on this, right? I mean, it's, we're kind of working with a lot of assumptions, some soft information. We're gonna get much harder information beginning today, based on yesterday's orders coming through the website, right? So over the next couple of weeks, we'll really be able to see, what's the recovery of revenue, what's the recovery of orders on the website, who has come back that didn't, maybe, to your point, had not ordered anything during that four-week period. Our range is in that kind of $350 million-$500 million range in terms of what the potential lost revenues can be, taking into account what kind of tail might come off of this-
Yep
of how long it might take to get some customers back, right?
Okay.
It's really a $350 million-$500 million top-line effect that we're working with right now.
So if I take that $350 million-$500 million, and I have to assign a decremental margin to land at your $0.55-$0.75 hit for Q4, I was getting, like, you know, 20%-25% on the decremental?
That's correct. Yeah, so on an operating income basis, it's about a $90 million-$130 million range that we're looking at. Most of that coming through gross margin, 'cause what we're gonna see is, we're gonna have some discounting of prices for certain customer categories. We also are assuming, like I said on the call, a little bit of a risk to our rebates. Most of our rebates are sell-through rebates, so we've had to assume some risk there. If we recover more sales, then we'll also recover more of those rebates, right?
Okay.
So that there's. Like I said, we're working with a lot of soft assumptions right now.
Yep.
We'll be able, i f in fact, as we get well into the quarter, and we feel more comfortable about what it is, and it's materially different than what we have said, we'll obviously be required to disclose what we think those differences are.
Okay, but those are great building blocks right there in terms of the revenue and then the EBIT impact, and, you know, the decremental seem to be in the, in the same zip code or, or neighborhood we were at. So let's think about 2024, because-
So just let me Jon, you know, we have an insurance payment that will come. We can't recognize that until it actually arrives, but that will cushion the-
The blow, the 55-75.
Yes.
Okay. And then, you know, as we were sort of saying, I don't want to say no one cares about 2023, but this is all about 2024 and where that goes, and, you know, maybe the one thing Wall Street does do is predominantly look forward, maybe sometimes only a day - but looks forward. So, you know, let's think about the core business, $522 midpoint, and we're gonna put some growth on that. And maybe it's not high single digits to low double digits because dental's a little bit softer. I don't know. I mean, you do have some accretive acquisitions, but let's put a growth rate on the $522... and then what, Ron? The right exercise would be figure out the lost sales, the tail into 2024, and put the same decremental on it.
Definitely not higher, because your decremental in Q4 has some of the promotions, but put the same decremental on it, and I take my $522 +6%, that's my number, less the hit, and that's the zip code or area where we're falling out for, for 2024.
Yeah, when we provide 2024 guidance, which we plan to provide that when we release our Q4 earnings in mid-February, we'll include, to the extent that we believe there's some headwind in 2024 associated with any kind of tail coming off of this cybersecurity incident, we will make sure that people are aware that what our assumption was when we do that. You know, we'll also talk and something we talked about a little bit during the Q&A session on the earnings call on Monday, we have been working with some assumed growth rates in the market that we communicated on our Investor Day last February, and one of those was that we've assumed that, for example, dental markets are growing annually 2%-4%.
You know, right now, I think if you asked us to commit, where do we think that market growth rate is for next year? We would probably be more towards the lower end of that range. Those are things we will take into consideration when completing our 2024 budget, which has been interrupted through this process, and then also providing our 2024 guidance. We start with those market growth rates. What do we think we can do off of those market growth rates? We'll probably be starting with numbers that are towards the lower end of that.
Okay, that was very helpful. Just maybe to double back on what I tried to lay out. Fair construct, silly, nothing broken in there in terms of how I tried to bifurcate it and grow more?
Yeah, it's a reasonable approach.
Yeah.
Yeah, it's a reasonable approach.
That's what I strive for, reasonable.
Okay.
Okay. Alright.
In the end, it's only a question of how long will the tail be? We're gonna get the business back.
You're gonna get the business back.
Yeah, I mean, our brands are pretty good, and, I think we're known in the dental industry.
Okay, fair enough.
And in the medical.
So let's hit on medical for a second, and Ron, it plays off of what you just said, but at your Analyst Day, you called out two to four for dental, maybe you're at the lower band of that now. You also gave us some good medical numbers in mid-single digits, right? Now, you've been fighting really tough comps. You're working your way through that. I think it's in you know the Q1 of next year. But I also feel on the earnings calls, you've talked about some of this business moving more to generics, and there's a trade-off there, right? Less on the top line, but better margin profile. Should we recalibrate the medical numbers that you gave at the Analyst Day a little bit to take into account the generics?
Well, I think it, y ou know, that example is, is, at least in my personal opinion, why it's important to not only look at year-over-year, but kind of step back at this. When we're talking about long-term growth rates, for example, in medical, and in, in the medical subsegment in which we operate, we've said that that growth rate is about a 4%-7% market growth rate. Yeah, that's really a long-term CAGR. While there is some pressure on that number this year, especially given last year's comp, I think if you step back and look at the three years, we're consistent within that range in terms of the CAGR, and I think that's the best way to look at it going forward.
Okay.
You know, look, more of a, you're gonna have, you're gonna have a year like we're having this year of 2.5%-3% growth in medical. Last year, we were approaching double digits consistently every quarter, again, excluding PPE and COVID test kits, but we do think over the long term, we can consistently grow this business.
Okay, if you-
But if you add the two together, last year, this year, it's roughly about 12% growth, half of that, 6%.
You land right in that four to seven.
Yeah.
Is it five to seven? You know, there's a variable in there, 100 basis points or so for generics.
Okay. I wanna spend the last two minutes, Stanley, just picking your brain on, you know, dental equipment and sort of where you see this evolving and where you see it going, and maybe just to rapid fire, can milling and printing coexist? Can printing, because of its lower cost, really broadly get down to dental and DSOs embrace it 'cause of a different return on investment? Maybe let's start there.
Well, in the long run, printing is there. It's a matter of improving on the machinery, but also the materials.
Materials, okay.
There's a huge amount of activity going. So will there be mills? There'll always be mills. Will there be laboratories? There'll always be laboratories. So how this all plays out is, it's gonna be gradual. We've never had anything in dentistry that's been, "Well, the whole thing has changed." But clearly, scanners will come down in price and they'll be more sold. 3D printing is gonna grow significantly, and in markets where we're not even in, like the developing world today, there's a big opportunity. And the mills will be a steady, probably a little bit going down each year.
To push you on the 3D printing, you know, the materials will get better. The materials right now or the applications seem to be used for stuff that temporarily goes in the mouth, but not permanently. Do we get to a material standpoint where we are talking restorations, we are talking, you know, stuff that resides in the mouth and the durability is there?
I think so, yes. There's a lot going on. I think it's a bit more than temporary. I don't think the cosmetics are perfect, but for the back teeth it's fine.
Posteriors.
There's a lot going on in this area.
Okay, and the last one, just on the intraoral scanners. So you talked about the units are good, you're experiencing some pricing pressure, but do you expect to be on the back end of that entering 2024, is where the ASP comp sort of eases?
Right.
Or is this a little bit of a— I would say, an ongoing spiral from a pricing perspective?
In our call, we said we could see the end, maybe one or two quarters from now. But I think actually it's a good thing if the prices come down, because we'll sell more of them, and, this should be standard of use in dentistry. I mean, if you've been a dentist that's used the scanner versus one that's using a still impression-
Find a different dentist if they're still using impressions.
I wouldn't go that far because we're selling a lot of materials, impression materials. We don't want to kill that business, but it's going to be standard of care. When? two years, three, four it's gonna be standard of care.
Okay, fair enough. I think we're gonna have to conclude there. Ron and Stanley, thanks very much for your time.
Thank you.
Appreciate it.
Thank you.
Appreciate it.
Pleasure being here.