All right, why don't we get started? I'm Jason Bednar. I cover MedTech here at Piper. Our next fireside chat is with Henry Schein. Very happy to have with us today, Schein's CEO, Stanley Bergman, and CFO, Ron South. And Graham Stanley from IR is in the audience here. So, thanks a lot for being here, both of you. I really appreciate it. A lot to talk about right now with your business, Stan and Ron, so why don't we get right into the Q&A? I wanna spend some time on the dental market, and really, you know, talk about some takeaways with the Greater New York Dental Meeting.
But first, I think it'd just be helpful for everyone here to cover, you know, we did have a little bit of a recurrence with the cyberattack. You took your website down last Wednesday. We had some updates here over the Thanksgiving holiday weekend, but you're back up as of yesterday. So maybe give us a little bit of updating on what actually happened, and what's the status as of this morning with your various e-commerce systems?
So I can't get, Jason, into the absolute specifics because there's obviously a criminal investigation. But, we have pretty good experience now in managing through this kind of activity, and our website work to restore the system was undertaken pretty quickly in about a 3.5-day period of time. As you know, what we're doing, and we've mentioned this to the Street, is we have very good backups. So what we're doing is restoring each backup. We have to check to make sure there's no, what they call, sleepers in there. And then, as we, our IT people and our consultants and our forensic people become comfortable, we turn it on again.
And so, we've gotten pretty good at this, and the system was up in the U.S. before business yesterday, Canada a little bit later in the day, and the U.K. this morning, and then the rest of the world we expect in the next day or so.
Okay. Is there a concern internally this is just a recurring issue right now because you have these attackers that are being relentless?
It's very hard to say, but I think something like 80% of these situations, there have been recurrences. We, at the moment, feel very comfortable and have, really, since the beginning, that we do have our backups. And if you look at the history of other companies, companies don't usually have the kind of backups we have. So we're comfortable that we can continue to go through this process, should we be attacked in a... Well, everybody's attacked thousands of times a day, should there be a serious issue. But our outside consultants, and we have several, you know, world-class firms, feel that we're in pretty good shape. But, you know, no company is immune from this. So at the moment, we feel pretty good that our recovery is going well.
Okay. All right, perfect. Other topical item here from this week, so Greater New York Dental Meeting going on as we speak, really right in your backyard. This is a really important trade show for you. I was over there yesterday. Seemed like the feedback was, you know, we're almost back to pre-pandemic-type activity at the trade shows, which is a little bit odd. It felt like for a while, maybe we're going away from trade shows, but what I heard was, you know, activity was pretty darn good on Sunday, especially.
Yeah.
You know, some really good equipment buying on high tech equipment, IOS, the scanners, 3D printers. So I guess, is that—does that all align with everything you saw out of the show, really so far? And maybe the follow-up would be: How do you reconcile this good buying activity with what was maybe some more guarded commentary about equipment coming out of the third quarter reporting cycle?
Yes, Jason. Firstly, Sunday was active. I'm sure you heard that from others. Yesterday was not great, but never is on a Monday.
Right.
Actually, what has happened in the last quarter is activity starts with, for us on the equipment side, for the DS World, which was a little later in the quarter than in previous years, but it was pretty active. So, we expect to have, you know, good conversion from the DS World and where we had interest, but were not able to convert. We feel that for Northeast customers, this is a good place to close. It seems, you know, we mentioned this in our last call, that traditional equipment is steady. It's not the kind of inflation that we had in the previous two years. It's steady, but there is a significant interest in the scanning devices. Having said that, the prices have come down significantly. We've been asked, you know, have we reached the bottom?
Hard to tell. Probably yes, but there is a growing demand by dentists for these devices, and it's not necessarily the most scientifically driven dentists that are buying now. It's very often people that say, "I want one of these things. I just want it to work, do the basic work, and I can get a good deal from a number of suppliers." Having said that, the very top end, one of our suppliers is doing quite well for the more sophisticated IOS devices. Mills are not great. We've mentioned that before. I think that 3D printing is gaining momentum, but not enough to cover the challenges in the printers.
Do you think that's more of just a 2023 issue, as 3D printers have taken off and mills have taken a step back, and now when we go to 2024, we're kind of at a, at a better baseline? We've anniversaried through a lot of these issues and, you know, the pricing situation and IOS scanners, again, knock on wood, doesn't get any worse. And then 3D printers continue to grow off of what was a good 2023, and mills are kind of at a, at a new status quo. You know, that, that seems like a setup where equipment can actually have a decent year next year.
Your thesis in the categories is all pretty good, except I'm not sure about mills.
Okay.
Because what has happened is, believe it or not, the dental laboratories have become more efficient. You know, they can now receive the scans, they can manipulate, et cetera, and their turnaround times have improved. There's now been some consolidation, and so the more sophisticated labs are turning around high-quality products very quickly, very accurately. And I think for many dentists, this is not a bad alternative. So there is that shift. Of course, we are significant distributors in the lab space, so we pick it up there. And I think there should be some excitement on the lab side with respect to 3D printing as well in 2024. Again, from a $13 billion company, this is at the margin.
Right.
But, for that particular sector, there is, I think, a movement not only to the 3D printing in the operatory, but also I think a bit back to the lab.
Yep. Okay. Ron, a lot of focus the last few weeks on, you know, account recapture, promotional activity that might be going on. Has that commenced yet in order to go recapture some of the business that hasn't come back to Henry Schein? Have you started that promotional activity, that targeted promotional activity with some of those accounts to try to win back that business?
Yes. When, you know, when the website was reactivated on... I want to say, well, we released earnings on the thirteenth, and I think it was reactivated either that day or the following day.
Right.
We got, you know, we did see. I think there may have been a little bit of pent-up demand, you know, where people had worked down stock a little bit. So we, you know, we had some good weeks. It's a little volatile, which suggests that there may have been a little pent-up demand, but we feel like the volumes were approaching normal. We are offering, you know, some promotions to all our customers. We're not going after a subsegment of customers we felt like we lost. We also are very appreciative of those customers who kind of stuck with us during that kind of four-week period that was very difficult.
So we are offering some promotions to those customers, and we'll likely continue with those promotions for, you know, at least through the end of this quarter, would be my guess. Well, what will be the effect into 2024 remains to be seen. A lot of it will depend on what kind of retention we see and what kind of recovery we see. We said on the thirteenth, we said that we would provide guidance when we release our Q4 earnings, which will be in February. And when we do that, we'll provide some flavor around what are our assumptions that of the...
of any kind of lingering effect or what's the tail of this going into 2024, so that people can kind of understand core business versus some of the noise that might still be out there.
When you say lingering effect, are you of accounts receivable of customers still coming back or lingering effect of promotional activity continuing?
It could be some combination thereof-
Okay.
-frankly.
Okay. Okay.
I think along those lines, just add a little further clarity, our larger customers, customers and mid-sized customers generally understood what was happening. They know they've either had one of these attacks or they know that it's unfortunately a part of commerce today, and I don't think we lose many of those. Having said that, we want to show appreciation to them, so we're offering some one-time discount opportunities. It's the smaller accounts that come episodically to our site, look for pricing, et cetera, that we have to have something that keeps them excited, brings them back. But we're going to provide these kinds of promotional or one-time discounts to the entire customer base.
Okay. Let's maybe pivot over to some pricing dynamics in the industry. This has been a focus from, you know, folks like myself, investors as well. You know, the general mood has been here. You got, you know, pricing that's probably moderating for consumables. We had been running probably +2, +3, maybe even +4 in some categories. But you now have an accelerating shift to private label consumables. It's probably, you know, making manufacturers a little more hesitant on pushing through bigger price increases, maybe some moderating demand, as well, you know, making them also a little less aggressive on pricing. So what happens?
What do you think happens when we look ahead to 2024 and think about the direction of pricing from manufacturers and then how that influences your business as we think about the top line?
Yeah. I think you summarized it correctly. What we had was some significant price increases, particularly from the larger suppliers, and it didn't stick. Either they had to provide more chargebacks to the bigger customers, or they lost market share with the smaller ones, midsize and smaller. I think that is now being understood, and I wouldn't call it a list price production. But I think there is an understanding that if they want to if these bigger players want to maintain market share, they're going to either have to cut some kind of a deal through us, of course, with the larger customers or the smaller ones, it's going to have to be promotional activity. Because if not, product moves to the corporate brand and/or the mid-size distributors.
There are very few products in dentistry that we've consumed, where somebody can say, "Well, I have an anti-lock brake that no one else has." It's not like in branded pharmaceuticals. So, this is working its way through. I would be surprised if there's much inflation next year, either on the consumable side or the equipment side. From our point of view, of course, corporate brand carries a lower selling price, but the profit per unit is pretty good, and so we're relatively agnostic. We would, of course, be comfortable selling the brand if we can get a price that our customers appreciate.
Sure. So to go back to a comment you made, you're saying that you think inflation nonexistent. I can't remember the word you used, but probably, probably won't see much price increase or price inflation next year. That's your expectation from the branded manufacturers?
I would expect that.
Yeah.
I mean, there may be manufacturers that decide to, like in the pharma world, you know, the generic, they take it up, and they figure out, you know, they will lose some market share, but they'll make more money. But if a manufacturer wants to keep market share, they're going to have to understand this dynamic.
Yeah, but you haven't seen that yet, where manufacturers have announced price increases that are similar to what we've seen in the last couple of years?
No.
Okay.
I mean, there may be particular product categories, particular manufacturers, I'm certain.
Sure.
But-
But holistically.
I think manufacturers, those that are close to their customers, close to the dentist, will understand this. This is not an issue on the medical side, where, I mean, it's, there's very little inflation on that side. Maybe it's a new product or something, but-
Okay. So when we look out-
I wouldn't call it deflation, but I would say it's-
Sure. Yeah, I mean, maybe to be clear, I mean, this is going back to where we were before-
Mm-hmm
... we ran into a lot of inflation.
Yeah, exactly.
It's kind of flat to slightly positive. Yeah. Okay, so when maybe taking a forward-look view now, Ron or Stan, you know, what's your level of visibility as we look across each of your business segments? You got dental, medical, and tech and value add. When we look at 2024, how comfortable or what's your level of visibility as in from a demand perspective on each of those segments?
We've looked at, you know, the kind of historical trends in terms of market growth rates and the, you know, and the various subsegments in which we operate. As you recall, Jason, last February, we did an investment day, or investor day, excuse me, and we provided some assumptions, you know, kind of that supported our long-term goals. What would the market growth rate be in various operating segments? For dental, we had been assuming, you know, the trend had been kind of a 2%-4% growth.
We do think just based on the trend we saw in the latter half of Q3 going into Q4, as we said in our prepared remarks earlier this month, that we would expect the 2024 market growth rate in dental to be more towards the low end of that range of that 2%-4% next year. I think when we look at dental specialty products, slightly different subsegment and, you know, historically, those market growth rates have been 5%-8%, but I think we're going to be towards the low end of that as well as we see, that can vary. It can vary by specialty product. It can vary by geography, right? We're seeing greater softness in implants than we are, for example, in endodontic products.
But within implants, that softness tends to be concentrated more on the premium implant versus the value implant. So we feel, we feel like we can address that, especially in North America. It's more so in North America than it is in Europe. So you have to kind of really kind of keep peeling that onion a little bit, right? One of the things we're going to try to do to address this in North America, you're familiar with the transaction we did. We bought S.I.N., an implant manufacturer in Brazil. We closed on that transaction in July of this year, and they do have a value implant that is already FDA approved, and we're going to be able to sell that through our BioHorizons subsidiary in the U.S.
So it's an extension of their product portfolio that we think is very much more so in demand than perhaps the premium implants that we're seeing in North America. So that 5%-8%, I think we probably go towards the lower end of that 5%-8% as well, but there's some opportunity there. We think there's some opportunity there as we kind of make some changes in our business, and we also have some new products that we'll be launching ourselves next year in on the implant side, that we think can also, you know, help us with our growth there a little bit. Medical, we have said, you know, the historical trend was 4%-7%.
We're lagging that a little bit this year, but it's coming off very difficult, you know, comparisons from the prior year. When you exclude the kind of noise you get from PPE and COVID test kits, last year, our medical business was consistently providing 10% top-line growth or higher each quarter. So the fact that we're down kind of low single digits with that in that subsegment this year doesn't concern us too much. A lot of that is last year was a very heavy flu season. We had, you know, significant sales in flu diagnostic kits. There was a lot of patient traffic into the physician offices.
So the fact we're getting at least a little bit of growth, we're pretty happy with that, and we think that over a longer term, that CAGR can stay kind of in that 4%-7% for us. And then lastly would be our technology and value-added services businesses, which we really see as kind of an 8%-12% growth opportunity in the market. And we're experiencing. We're very happy with the growth we're seeing there. And Stanley and I just met with the management team at Henry Schein One last week. Very excited about some of the division they have and around kind of improving revenue cycle management for our customers. Just expansion of our practice management systems that are available.
We think we can achieve those growth rates and possibly take some market share there as well.
Okay, that's really helpful. Going back maybe to medical, is that staying within four to seven next year? Can you, can you stay within that four to seven next year? Or do you think you end up at the low end, similar to dental and, and specialty?
I think, you know, for medical, just given what the growth rate is coming into the year, we would probably say something that's a little lower.
Sure.
Right? Having said that, you know, we're making very important investments in the home healthcare space.
Yeah.
We're not, we're not becoming home healthcare providers, but we are providing product to home healthcare providers. And that is a, that is a faster-growing segment or sub-segment of that segment, I should say. And it's also has slightly better margins than your legacy medical businesses out there. So, you know, we, we have some integration we wanna do with those businesses, but we think that as we continue to, to bring those, into the fold as part of our medical business, that will help with that growth.
Okay. I wanna pose something to you because you brought up M&A a little bit. Tell me where I'm wrong here. So when I think about some of the effects of what M&A has done to your business this year versus next year, you've allocated a lot of money to M&A this year. I think over $1 billion. That also results in a lot of deal integration expenses, a lot of one-time costs, things that you did not exclude from earnings.
Yes.
And also, you know, led to probably a, maybe a, you know, you think next year you could probably have a reallocation of some of that capital, maybe more to share repurchases. And then you also should have probably better year two financials from some of these deals that are layering into the model this year. So I get... I think that's all right, but when I put all those together, that should have a, you know, maybe a net positive effect on earnings next year. Is that - do I have all that right, or am I wrong on any of those assumptions?
Yeah, you're right. We've committed over $1 billion in capital on M&A this year, which is a very high number for us. Typically, we were doing $300 million-$400 million a year, and I would expect us to probably return to something that's closer to that $300 million-$400 million next year, as opposed to the $1 billion we're doing in 2023. It does put a bit of a, you know, it's a little more of a burden on the balance sheet than what we've done historically. I'm still very happy with the leverage that we're at, but it does, you know, create a higher level of interest expense. The transactions we did this year will contribute to operating income growth for us next year.
From an EPS standpoint, they're gonna be much closer to neutral, given that additional interest expense. But to the extent we can continue to generate good operating cash flow, you mentioned or perhaps we increase, you know, share repurchases next year. But we'll have to look at that allocation and say: Do we wanna take some of that operating cash flow and increase share repurchases, or do we want to reduce that debt? And that's the formula we'll have to look at so we can bring down that interest expense as well. So there's gonna be kind of an ongoing, you know, as every company does, an ongoing analysis of where do we think we actually get the better accretion to our earnings as we generate that positive cash flow going forward.
Sure. But you, to be fair, either of those, whether it's debt paydown or share repo, like-
Yeah.
reallocated M&A capital
Exactly.
would go to
Mm-hmm. Precisely.
Okay. So then on the move into home care, you know, I guess I understand this is a big secular shift in healthcare, and it's probably a good question for you, Stan. But what's the value-add move for Henry Schein? Like, why are you the right company to be distributing products into the home?
First, Jason, strategically, you've got to follow the patient. The patient is moving out of the acute care setting. I had my knee replaced in April. I was out of the center the same day. So that's where the patients are going. So that's number one, but number two is we have very good relationships with the referral sources. So, that's very good from that point of view. And then the bigger one is that our big IDNs, several of them, wanted a consolidated bid for both the alternate care setting, ambulatory surg- ASCs, ambulatory surgical centers, and home care. We were supplying some of these products, but we just didn't have the ability to do the billing, which we now have through these three acquisitions we've made.
Okay. And then, and I know you've made comments in the past about potentially wanting to do something within, you know, orthopedics or, you know, some maybe-
Mm-hmm
subspecialty of orthopedics, leverage your, your existing presence in ASCs. You know, what, what could that look like? Because I think a lot of people in the room probably naturally think, oh, this means hips and knees, but I know that's not what you're intending to do. So maybe, you know, illuminate for us what that, what you intend.
Well, can't say we'll never be into hips and knees, but that's- those are huge markets.
Right.
There are other markets in the orthopedic area that we actually brought management on board four years ago to work on this with us. They've been running other parts of the business, and this team is raring to go to advance our orthopedic business. We already have a very nice business in the saws and blades arena, and we hope to add some other orthopedic products in the not-too-distant future, but I don't think it will be in the knees and spine or
Sure
... the hips, the big markets.
Okay. We have about 30 seconds left. So same question for, for each of you, and come back to me. A little bit of a 2024 visibility question: Do you feel more comfortable with the top line outlook for next year, or more comfortable with the margin outlook for next year?
I'd like to hear what Ron has to say.
You're... Ron, Ron, you're going first.
He's finalizing the budget.
I hope I get it right. I think I probably feel more comfortable with the margin outlook. I think the ongoing... It's not like it's a seismic shift every quarter, but we're seeing a little bit of a shift to lower-priced corporate brands or lower-priced national brands, as well as our own corporate brands. That suppresses sales growth a little bit, but it gives us, you know, good margins. Also, I remain very bullish on our specialty products. They are higher-margin products. I think we can get growth there that will outpace the rest of the business ultimately, and that's gonna give us better gross margins as well.
Yeah, I mean, directionally, that is correct. The, unless there's a big shift with some of the major manufacturers, I think, these manufacturers are gonna see on the, a lot of the commodity products, the technique-sensitive products in the industry, a shift to brands that are trusted but at a lower price, and, these are good margin products. On the specialty side as well, whether it's endodontics or, or implants, the high price, higher price and the lower price, they will work. Otherwise, the FDA wouldn't approve them.
All right. That's a great place to stop. Thanks for joining us today. Really appreciate it.