Great. Good morning, everyone. I think it's still morning. Welcome to this session of the Leerink Healthcare Crossroads Conference. I'm Mike Cherny, the healthcare tech distribution analyst, but much more importantly, we have the Henry Schein management team here. Ron South, a longtime exec and CFO. We also have Graham Stanley and Susan D'Onofrio, in the audience for us. I think we're just gonna hop right into questions.
Please do.
I don't think we have anything we need to prepare about. The last few quarters have been probably odd in your dental business. I mean, you have moving pieces. I think a lot more positive trends that people anticipate on base level consumables, on some of the areas on value implants, areas that you play in. Importantly, I know we're gonna touch on some of your portfolio changes, but obviously against the backdrop of the cybersecurity incident, which took a chunk of your revenue out for completely abnormal reasons. Where do you think demand sits? You know, more from an underlying basis before we get into some of the growthier categories than your book of business right now, especially coming off the back of the cyber incident recovery and how customers are coming to you for, you know, current their current volume needs.
Certainly, I think, you know, what we're experiencing and what we've kinda seen in the market is that kind of core fundamental merchandise is, you know, staying relatively flat, right? I mean, there's some—I think there's still some growth on the specialty side. You have to kinda dissect it, though. You have to kinda look at... You know, people wanna say, "Well, what's happening in implants?" Implants, you have to look at, you know, are you talking about full arch? Are you talking about, you know, individual implants? Are you talking about special, or I'm sorry, a premium price versus value, value price? And there you can, you know, those dynamics are impacting the market somewhat.
But, you know, we feel like there is kind of a base of demand out there that's, you know, has created some stability to the dental markets. It's just a question of how do we kinda build on that base to get, you know, better growth going forward. We are experiencing a little bit of, you know, you see some movement from some manufacturer brands to others, perhaps down to private label. Well, that will impact that top line, but we still get, you know, decent gross profit dollars out of that, when we get better margins. So, you know, it's easy to get hyper-focused on the top line, but we consider gross profit dollars to be important as well. And that's on both the core merchandise as well as on specialty.
To the extent that we're selling more value implants, that's still, you know, gives us, you know, some pretty good margin as well.
I'm gonna dive into the specialty side in a bit, but I wanna stick on kind of the core dental, as we know, and on the merchandise side. I'm happy you mentioned private label, 'cause that's been something that's been a-
Mm-hmm
keystone of Schein for as long as I've known your business. As you think about the discussions going on now with customers on the demand side, how much does private label continue to grow as a focal point for them from a pull perspective, versus how much are your sales reps going out with a push dynamic, given some of the lack of differentiation that you'll see on branded products in the market?
Yeah. I would still say it's more pull than push at this point. And part of that is, you know, we, you know, historically, we have not gone out and led with private label. You know, we wanna maintain that balanced relationship with our manufacturing partners. But, you know, a topic that came up, quite frankly, you know, frequently during the higher inflationary period was, you know, a lot of manufacturers got pretty aggressive with their price increases. We weren't gonna lose the sale. If we had a customer balking at a price increase, then we could steer them to something that was lower price.
We made sure our manufacturer partners were aware of that, you know, when we let them know that there were some price increases there that may be difficult to, you know, for us to pass on. So, but I do think it is more of a pull. The exception to that can be with some of our larger DSO customers, who are looking for, you know, competitive pricing on certain merchandise. And for us to be able to provide that pricing, it could be that we have to offer them the private label in order to get to that pricing. Quite frankly, they're okay with that. They like that.
We're meeting with a customer not that long ago, who told us, "You know, I wish you guys had more available in private label." So they're happy with the quality of the product they get, they're happy with the pricing they get. That's where you might see a little more of a push, but again, that's so that we can kinda protect our own base of business with those types of customers.
I see we passed along to your business development team. I'm glad you brought up the DSOs as well, 'cause I think there's been... DSO has been growing as a percent of share for, again, as long as I've known Schein. I think there's a bit of lack of understanding of DSO economics to Henry Schein as a business, and you talked about private label. I know there's also selling costs. Can you give a puts and takes on the health of why DSOs are important to you and the moving pieces that you do see? I'm not asking for specific numbers, but underlying on-
Yeah
... why the margin structure or the margin capture on DSOs, at least from a dollar basis, isn't as drastic a difference as people think.
Yeah, I know, it's a dynamic that perhaps is not completely understood, and one that is important to explain. You know, our especially the larger DSOs, you know, it's a very strategic relationship with them. It's not a race to the bottom of pricing in terms of, you know, how cheaply can we sell them, you know, a bag of cotton balls or a box of gloves. It's really about how can we help them make their practices more profitable? How can we help them grow their practices at a rate that exceeds market. And that starts with. Obviously, the negotiations typically start with: What can you, you know, how can you provide me product at a competitive price?
From there, it might be, "Okay, we can do that if—but you, we want you to accept private label. And by the way, we also want you to—to buy specialty products from us." Our specialty products, our implants, our endodontic products, orthodontic products, are all self-manufactured. We're getting manufacturers' margins on those products. So if we can move them to our specialty products, we can provide them with private label, and then also, if to the extent a lot, a lot of... You know, Heartland as an example, they like to have their practices on a common technological platform. To the extent we can move them to Dentrix, our practice management software, then you—now you're really getting some scale.
Even on the distribution side, with the merchandise, we typically, because the way the contract is formed, we're not paying commissions to reps. So while we might have a smaller gross margin, we also have a more efficient delivery. And so, you know, we can still protect that operating margin when all is said and done, especially as we increase the sale of specialty products and our technology offerings to them.
I want to touch on equipment here, 'cause I know that's been a big variable point across the entire market recently. This is not the first time that we've seen equipment cycles-
Yeah
... whether it's product-driven, whether it's macro-driven, it seems to be like a bit of both going on right now. And so can you give us a current lay of the land on where you're seeing the strongest pockets of equipment demand, and where you're seeing the potential embers for a recovery on some of the areas around basic, or some of the other high-tech software areas, and how they could come back over time?
Certainly. So, you know, I think on equipment, it's important to kind of really not isolate, but kind of separate standard equipment from high-tech equipment, because they can be. You know, they, they are impacted by different things in the market. You know, for us, about two-thirds of our equipment revenue comes from standard equipment, the other third from high-tech equipment. What we saw coming out of the pandemic was, a greater demand for standard equipment that was largely driven by practices who were expanding on a post-pandemic basis. There was a lot of, there was a lot of movement of patients and a lot of disruption to the end market that occurred coming out of the pandemic that I think has been kind of underestimated by people.
A lot of patients changed dentists from a dentist close to where they worked to a dentist that was close to where they lived if they were starting to work from home more. So you had a greater churn of patients in the end market. That created a lot of opportunity for some practices to expand, to renovate, to do what they did. We saw, in many quarters, double-digit growth in standard equipment over the course of 2021, 2022, and into 2023, in some cases. So that market has now kind of stabilized, and we think standard equipment will, those growth rates will be pretty flat, you know, but, you know, for the balance of the year. But if you look at that, you know, where were you in 2019 on standard equipment versus where you are now?
It's a higher base. That CAGR is still quite good on standard equipment. High-tech equipment, conversely, we saw some disruptors come into high-tech equipment over that same period of time. Specifically, you had low-cost scanners being introduced to the market that really brought down the average selling price on scanners across the board. We've seen over the last couple of years very good volume growth on scanners, but it hasn't translated to revenue growth for us because those ASPs were lower than they had been historically. Those ASPs are now stabilizing, and we're starting to see some actual revenue growth with scanners that we, for example, had very good growth in the first quarter.
And as long as there's not another big price decrease that comes through or somebody else entering the market at a you know, significantly lower price, we think that has stabilized at this point. The other disruptor on the high-tech side has been the introduction of 3D printers into the market. 3D printers, you know, you can buy a 3D printer for a you know, a premium one for $15,000. If your alternative is you're thinking about a chairside mill for $50,000-$60,000 or a 3D printer, a lot of practices are willing to take that, make that initial investment in a 3D printer. The question becomes: What's the scope of application is gonna be?
So what we've seen is, you're now seeing that you can make crowns with 3D printers. I think there's still some wait and see in the market as to what's the viability of those crowns gonna be. Are they gonna be have a long-term life, such as a crown that's made in a lab right now, or what's gonna happen with that? But there's more and more materials that are becoming available for 3D printers that could make it a more attractive proposition for the practices. So as a result, you're getting growth in 3D printers. Chairside mills have kind of stabilized a little bit. They really did come down. Most of the chairside mills that we've been selling have been replacement mills. You don't see a lot of practices making that initial investment in a mill.
But we are still selling some chairside mills, and we actually had some growth in the first quarter in chairside mills as well. So I think what we mentioned in our call, now three weeks ago, was that, you know, really the equipment growth that we saw in the first quarter came from that CAD/CAM and CAD/CAM-related type of equipment, scanners, 3D printers, and chairside mills. And we think that particular subcategory can give us some equipment growth in the balance of the year.
So I have two follow-ups to that. I feel like it's an earnings call by saying that. Just let me make sure I heard you right. Basic equipment, then, your guidance is flattish-
Yes
... rest of the year?
Yes.
Okay, cool. And then on the scanner side in particular. I think it was well documented, that whole dynamic of the differential price points and the lower cost scanners, and they fuel the multi-year adoption cycle. You said you had growth, but where do you think we are from a penetration rate on standalone scanners right now versus the applicable market? 'Cause obviously, there's still gonna be plenty of labs that don't do plenty of dentists don't do enough volume where-
Sure.
- All their work's still gonna go to labs.
So, I think on scanners, we're still, while it's becoming a more expected standard by patients, I mean, there are still a lot of dentists out there using impression material, right? So I think the penetration, there's still plenty of opportunity. You also see, I think, especially at the more attractive pricing now that you have with scanners, you're seeing practices add scanners. Maybe a practice had four chairs, but only one scanner. Maybe they bought three more, and now they have four scanners. They have a scanner per chair. So but there's still plenty of penetration to be done there. I think, what will be interesting to see, are we gonna get greater innovation with scanners going forward?
Will there be a reason for someone to stop using the scanner they have and to go and to buy another scanner because it's better, it has better features? I think that's innovation, and quite frankly, that the market's waiting for right now. You're seeing some of that now. You're seeing some of that start to come out, right?
Maybe this is just me not being an overly technophile, but I find the scanner innovation to be pretty solid right now.
Yes.
The fact that I've shown up in your booth at New York Dental Show, and I can do a scan myself, goes-
They're easy to use.
Yeah.
Yeah, they are easy to use.
So, where would innovation come? 'Cause I always think about innovation more in the workflow than on the product itself.
It would be more the workflow. It would be more the workflow, and the interoperability of that workflow, right? You know, so we're really, you know, we have a product that is really agnostic to... from an interoperability perspective. Any scanner can feed into that, into the workflow and then update records, send, you know, send an image to a lab, or send an image to a 3D printer, or send an image to a chairside mill. And that's, you know, important that you make that as efficient as possible for the practitioner. You want that to be 2 or 3 clicks, and you move on, not waiting to download something, not waiting to, you know, have to go back in and, you know, update information along the way.
And just last question for now on instrumentation and equipment. If, you know, you hear from your sales reps, you hear from the field, is there anything that you think right now or your customers right now is missing from an innovation perspective they wanna see move faster? And whether that's 3D printing or something else, like, I'm trying to think of what could be the next mini or significant super cycle of products beyond replacement.
Yeah, I think that, you know, the ongoing efficiencies that the practices can derive from digital dentistry is probably continues to be that opportunity, where you can provide better care to the patient. It's. You can also, in a perfect world, you can see more patients over the course of the day because you're able to get through things more quickly. Therefore, there's a return on that investment of, you know, of that high-tech equipment. You know, the pain points in the practices right now are more around the administration of the practice than the operations of the practice, I would say.
You know, if you sat down with a group of dentists, and you wanted to start talking to them about, you know, "What are some of the more challenging things you have?" It's not gonna take you very long in that conversation for them to start talking about dealing with the payers, dealing with understanding the patient's eligibility for care when they initially come in. Those are all things that really create inefficiencies in the practice. They end up with, you know, with their front office making a lot of phone calls to insurance companies and doing things that, quite frankly, can really slow down that revenue cycle for them.
That's an area of emphasis we've been, you know, really working with our customers on in an effort to try to improve the flow of information and that kind of broader revenue cycle management for them.
And maybe we stick there for a second 'cause, obviously, you have a wide portfolio of leading, software, internet-enabled brands, led obviously by Dentrix, which is quasi-ubiquitous across the practice management side. Where have you seen the biggest legs? It's been a few years now since the Internet Brands merger. Where have you seen the biggest legs for you to pick up incremental wallet share, mind share of your customers on that technology side? 'Cause obviously, that brings nice margin accretion to the-
Yes
... enterprise as a whole.
Yeah. I would say, you know, most recently, it would be on that revenue cycle management piece, especially on the, you know, when you kinda phrase it as 100% eligibility. It's knowing, you know, so that the patient knows immediately if they require some form of treatment, what's it gonna cost them, right? That's always been, I think, a difficult thing for the dentist. When the dentist says, "Look, you got a patient in the chair, and you identify the need for a specific treatment." If the patient says, "Well, how much is it gonna cost me?" The dentist doesn't know.
So now you're just kinda like: "Are you just gonna trust me to do it, and you're gonna be able to pay for it?" That's a difficult thing 'cause they don't know what type of coverage they have. So that's part of our Henry Schein One offering. That whole eligibility process is part of that offering, right? I would also say, and this is becoming an attractive feature to our DSO customers, business analytics is taking on a greater importance. Getting that dashboard snapshot of kind of certain metrics of how that particular practice is operating and identifying outliers.
If you have a group of practices, you know, who are the lower performing ones in certain metrics versus the higher performing, and what can you learn from that in order to improve the operations of that practice? That's a feature that when we purchased Jarvis Analytics about 4 or 5 years ago, we were able to add to the portfolio. And then lastly is kind of the introduction of Detect AI. We've had, I think, very good success with that. Heartland is now using Detect AI in their practices.
Detect AI will allow a dentist to take an X-ray of a patient, bump that X-ray up against a database of X-rays, and it will allow them to identify caries, which is kind of a pre-cavity that they can do through the AI tool that might not be detectable by the naked eye. That allows for a much more pleasant patient experience in terms of treating that versus treating a full-blown cavity that may not be quite so pleasant. Those are all areas. What we've seen, for example, from our customers who are using Detect AI, they are getting meaningful increases in restorative procedures as well as periodontal procedures versus prior to them you know using that product.
So that's good information for us to have as we talk to other potential customers there, because there's clearly a return. This is a, a subscription-based service that clearly brings a return. But those are all part of the spectrum of what, you know, what we're introducing through, through Henry Schein One.
Turning back to the specialty side, you know, this has become, thanks to both organic and inorganic growth, a much bigger segment than I think most would have anticipated. As you think about the organizational goals for your different categories, endo, ortho, implants, yeah, most companies don't go out and say, you know, the slogan's not, "We're number three," as, like, the rallying cry. But in this case, that, you know, there's some elements about-
Yes
you know, being a more ubiquitous provider if you're not the market leader. So how have you continued to calibrate your goals, think back versus last year's investor day, and, and where you're executing versus where it may be areas you've fallen short across some of your different specialty categories?
Certainly. I, you know, we're proud to be number three, given where we came from.
Yeah.
Right? And it's also, I think it's important for people to hear that who look at us as a pure distributor, because we're not a pure distributor. And the investments we've made on the specialty side, and, you know, when we say we're number three, we're referencing implants, we're number two in endodontic products. Is that, you know, that's about a $1.2 billion a year portfolio for us, which, when you're looking at our, you know, revenue of $12 billion-$13 billion, feels like a small number. But it's, you know, given we're getting manufacturer margins, it's a much more important part of our, of our bottom line.
When you collectively take those particular products and add to them, Henry Schein One, our technology offering, as well as the other value-added services we have, those are all brands or that we control. Those are our brands. We're not reliant on a third party. You know, we said in our Investor Day last year, our goal was for that group of products to be generating about 40% of our operating income, and in the first quarter of this year, it was just shy of 41%. So we've kinda reached that goal there. If you add in the private label that we mentioned earlier, if you add in private label, private label gets you approximately, call it 10% more of our operating income.
So those brands that we collectively control represent half of our operating income, which is very important to us. You know, so you know, where some of the areas are, you know, we made a lot of investment last year in specialty. We bought Biotech in France, we bought S.I.N in Brazil. They really kinda help us fill out both some additional geographic footprint, but also kind of fill out our our product portfolio in implants, especially in the U.S. We didn't really have a value implant in the U.S. S.I.N in Brazil has, excuse me, has a value implant that was already approved by the FDA before our acquisition of them. And we've been able to introduce that value implant in the U.S. now.
And we think that, especially with our DSO customers, who are looking to do more kind of basic implant procedures in-house as opposed to referencing them out, you know, they find the value implant to be a more attractive proposition. So those are areas I think we, you know, we've succeeded in. Orthodontics is still an area that we're trying to get some traction in. Biotech, the company we bought in France, that is, you know, we've kinda talked about that being an implant company. They also had a small clear aligner business, and we're taking a look at that clear aligner business versus our existing clear aligner business, and how do we get some scale there? How do we do something to maybe increase that traction in orthodontics?
That's probably an area, you know, that we'd like to get better at, you know, sooner rather than later.
Got it. And I'll use just ortho and then use this as a pivot over to the medical side. 'Cause obviously, you made a recent acquisition, you know, building onto your orthopedics presence on medical, which, you know, I'm still getting used to thinking about the totality of the Henry Schein specialty portfolio beyond distribution-
Yes
... and private label. But, yeah, maybe talk a little bit about this acquisition, 'cause this is a little bit afield from what Schein's done previously on the medical side, which has been growing like a weed for a long time before pre-COVID. How are you thinking about this as a building block for potentially building a broader specialty portfolio if you do want to do that within medical?
Yeah. It so our investment in TriMed, and that was a transaction that closed just this past April. You know, it is really—it's orthopedic products that are really at the extremities, right? So it's really kind of the hand and wrist, and it's more kind of foot and ankle. You know, it's a different market than if you're getting into hips and knees. You know, there's the Strykers of the world who really kind of have a good hold of that market.
But we saw the extremities as a good way to kind of, of working our way into the orthopedic market, because a lot of those procedures are done at the ambulatory surgical centers, you know, on an outpatient basis, which the ASCs are a very important customer segment for us. So this is something, you know, that we can kind of introduce to our ASC customers. And we do see it as an opportunity as we learn more about orthopedics. We'll be able to expand on that and perhaps go into other areas. I don't know if we'll ever get to the point of going into the hips and knees, but there could be other areas that we could expand into with that.
Similar to what we did with what we call our Home Solutions business, also on the medical side.
Yeah.
You know, Home Solutions is really a group of products that we are selling to home healthcare providers. We're not the home healthcare provider. We're not employing the nurses, but we are supplying products to home healthcare providers. And that is a subsegment of medical that, as a market, is growing faster than core medical, and it gets better margins than core medical. And so we, between our investment in Prism a couple of years ago and our investment in Shield last year, we've brought them under a common kind of hold co with common management, and that will kind of function as our platform. We think we can do more investment in Home Solutions going forward.
Yeah, and Home Solutions is a great example of being able to layer on where care is being delivered, but you're already very much positioned well there by being in the complete non-acute care side of-
Correct.
All things distribution and, and just continue to outpace volume growth. How much do you see your growth with it across the medical portfolio as site of care driven, versus share driven, versus general utilization driven?
You know, it's hard to kind of parse those out. I think the-
Maybe rank order? Yeah.
I think, you know, our general strategy in medical has been follow the patient. And as you know, years ago, we actually got out of the hospital business, so to speak, right? We know hospitals wanna have... You know, Cardinal is very good at that, right? They wanna have three pallets dropped on their, you know, on a loading dock. You know, they wanna be able to place the order at 11:00 P.M. for 5:00 A.M. delivery. That's not what we're good at. We are better at the small delivery. And, as more and more patient procedures work their way out of the hospitals and start working their way into the ambulatory surgical center, or more and more procedures that were simply being done in physician offices, we really put the focus there.
Now, as more patients are being treated at home, we're making that investment into the home as well. You know, utilization, demographics are on our side on this, right? I mean, I think that as, especially in the U.S., as we have a, you know, an aging population, I heard the other day that more people will turn 65 this year than in any year before or any year after in any of our lives, right? So this is a time that we are, you know, there's going to be more and more people cared for at home. I think it's how the infrastructure is likely going to address the demand for those types of services. I don't think we're gonna be building out nursing homes for all these people.
There's gonna be a greater emphasis on how do you get care at home is what people are gonna want. And so that, hence we're making the investment there.
Thinking about the investments being made, especially on the inorganic side, Schein has long had an M&A core competency, which is something I, I couldn't even remotely begin to count the amount of deals I've seen you do, announce, etc. That being said, your more recent acquisitions have been more product-oriented-
Yes.
-versus what was a long legacy of great geographic expansion, partnering with leading players in the market. How is your team thinking differently these days about the ROI on a deal, given that a payback period on a TriMed, on a biotech, is a little different than a payback period on acquiring the largest dental distributor in France?
Yes. Yeah. No, it's a great question. And you're right, we do have to look at them a little bit differently. This is part of how do you kind of build out the company to be a, you know, going beyond distribution? And so you do kind of measure the opportunity of a Biotech, you know, the implant manufacturer we acquired in France, or an S.I.N., the implant manufacturer we acquired in Brazil. You're gonna look at that differently than, say, the distribution acquisition we did in 2022 when we bought Midway, where that's a fold in. You know, Midway, we were able to leverage existing infrastructure. We were able to kind of capture some customers.
We were able to bring on, you know, some really good sales reps and some really good management from that, but we were able to fold them into our infrastructure, and it becomes almost immediately accretive for you. That's a different approach than when you have to kind of step back and say, "I'm gonna buy this manufacturer of implant products. I'm gonna... This is more strategic. I'm gonna look at this. I'm gonna have a longer-term horizon on some of these things." That, you know, but that is... You know, if it, if it fits in with our strategic plan, it becomes something that, you know, that, that is attractive to us, and we still think we're getting a good price, and we, we're confident we can deliver the returns that we're modeling out, and that's what's driving these acquisitions.
And then with regards, once the acquisitions are brought in, especially on the specialty side, any change to the sales infrastructure and how the sales force go into market, or is it because they're penetrating different areas of practitioners that it's not necessarily the case? U.S.
Yeah, any changes there would be modest changes, right? It would be more, you might train up your existing sales force a little more on you know any unique aspects of the product line of some of these businesses that are coming in, which can happen on the implant side. You can get some uniqueness to product, but it would be restricted to that.
Awesome. Well, we're just about out of time, so Ron, thank you so much for joining us.
Very good.
Thanks, everybody.
Very good. Thank you, Mike.