Guys, I think we're all set. John Block with Stifel. Thanks for joining us. Here this morning with Henry Schein, we have Schein's Chief Financial Officer, Ron South, and Head of the Specialties Group, Tom Popeck. Guys, thanks for joining us.
Thank you, John.
Thank you.
Ready for some questions?
Absolutely. Let's go.
We usually have Stanley kick us off, so I was gonna give you the floor, but I guess we can get right into it.
Absolutely.
I'll start with dental. Stable dental volumes has sort of been the theme in terms of how you've been describing the landscape. Ron, I'll start with you. Just any changes to that stable theme, either positive or negative?
You know, one of the trends we saw as we kinda got to the latter part of the third quarter was that, and the market data that we were collecting supported this, was that we felt like, you know, merchandise kinda moves with patient traffic. Patient traffic in dental offices has stayed, you know, you can say stable, which is a kind of another way of saying you're not getting the growth perhaps that you'd like to get out of it as well, right? But it's not getting worse. But we have seen that merchandise units began ticking up a little bit, but it's not really showing up in revenues 'cause what we're seeing is that I think there's a little more cost-conscious customer out there right now who is willing to either move to a lower-cost branded product or perhaps move to private label.
So that stability is, I believe, still out there for dental. We did see good growth, for example, in or at least sufficient growth in our traditional equipment. We did see a little bit of a downturn, more I think based on timing in digital equipment. And for us, you know, the traditional equipment tends to be more important. It's about two-thirds of our equipment revenues. But, you know, so we're, we're maintaining that stability, and we're just kinda looking for a little more stimulus in the market to get, you know, to accelerate that growth, perhaps, you know, more de novo investment as interest rates go down. There's some other things out there that could we believe could be beneficial for us.
And I'll try to distill it into, you know, dental consumables and equipment and break it apart. So, you know, when I mentioned stable, let's stick with, like, consumables for right now.
Yes.
It sounds like, you know, when we're dealing with basis points, you gotta get pretty, pretty detailed. So you mentioned stable, maybe a little bit of a slight pickup. So call it, like, stable plus, but a little bit more of a pronounced move to private label. I thought that had been the case for a while now. Like, is that accelerating, or are we, you know, first encountering that, and we have to go through 12 months or so until we start to lap that sort of a move? You know, maybe that's a better question for Tom.
Yeah, I'm gonna ask Tom to kinda chime in because he does look after some of our private label stuff, so.
Yeah, so what I would say is, it's definitely growing faster than the rest of the business. We are seeing that, customers are being more cost-conscious and looking for those value brands where they can, so.
Okay. And I think that's a, you know, really a function of the higher inflationary period we went through, say, you know, 18, 24 months ago, kinda raised this cost-conscious awareness from customers. And to what you said earlier, John, is that we have seen some on the margins, some, you know, some growth in private label that has slightly outpaced that of branded merchandise. And, you know, and you begin to see when you look at the market data and you see, okay, units are up, but revenues, market revenues are flat, then that kind of it kinda confirms that as well, right?
Just to push you, I mean, you know, to go after private label a little bit, can you just walk us through, like, if we were to deconstruct it? In other words, obviously, you get the lower revenue, but what does it mean from a gross margin perspective? Certainly, I'll sort of answer my own question. Higher gross margin, but isolate that gross profit dollar. Like, ultimately, where do we land on a gross profit dollar from a private label versus a branded consumable?
Yeah, I mean, typically, the gross profit dollars are gonna be a little better on a private label sale than in a branded sale. It can differ a little bit by product category. As you can appreciate, there's a lot of different product categories that we sell out there with private label. You also have to look at kinda gloves versus the rest of it because the glove market is still seeing some.
Yeah.
Yep, you know, some depressed pricing, right? So you have to kinda carve gloves out of that, but look at some of the other product categories. Typically, you do get better gross profit dollars out of a private label sale than you do out of a branded sale.
Okay.
Having said that, we're not leaving, you know. We still value our partnerships with our supplier partners. We're not necessarily leading with a lot of private label products, but we are, you know, seeing a little more pushback from customers, and that pushback has continued since that inflationary period. We're not gonna lose the sale. We can then offer up, you know, private label to them if that's, in fact, gonna be important to them.
And that's one of the things that's unique to Schein. Tom, maybe to throw this question to you, where are we in terms of we think about your dental merch business between private label and branded percentage?
The percentage? Ron, Ron, what would you say the percentage?
You know, again, it can really vary by product category.
I know PPE can distort that a little bit.
Yeah, private label provides us with, I would say, somewhere in that high single-digit range of our operating income, right? You know, so we've talked about this in the past, about how if you look at own brands across the board, meaning our specialty products that we self-manufacture, our technology that we develop ourselves, and our value-added services that we obviously own, and we own the, you know, the brands. That's about 40% of our operating income. If you then layer on top of that the private label, again, brands that we control, it's about 50% of our operating income.
Okay.
You know, across all brands. And I would say the contribution to operating income coming from private label is in that kinda 9%-10% range.
Okay. Maybe one more on consumables, and then I'll pivot over to equipment. But like, you know, what should we be looking for as that accelerant to underlying dental consumables? You know, you mentioned traffic hasn't been that bad, and that's what our checks show. Like, hygiene's busy. We always hear that the chair's relatively busy.
Yes.
But you're not seeing the conversion necessarily to the restorative, right? I mean, notably something like clear aligners, which is highly discretionary, but maybe there's even a leaky bucket on something like implants. So maybe, you know, is it a two-part question? I'm not sure, but is there one where the underlying visits even strengthen further? But more importantly, this is about increasing the conversion to some of the resto to see the dental consumable numbers consistently in that low single-digit plus range?
Yeah, I mean, we can cover a lot of ground there, but if you kinda just start with your core dental consumables, I think the stimulus we're looking for, like I was saying before, I believe, and we, as a company, believe that the demand for dentistry exceeds the supply right now. And as you said, hygienists are busy. Hygienists are busy, and if, you know, God forbid, you have to cancel your dental appointment and try to get back into your dentist, it can take a long time to get back in. So dental offices, dental practices are very busy. I think that stimulus is, how do we expand that supply? You know, at what point will interest rates get more attractive for some of the larger DSOs, for example, to build out more de novos than they have historically?
Because there is a demand for that supply, and I do believe that that could be the stimulus that could provide some growth going forward. You mentioned the more discretionary type of items, such as implants. Implants, especially in the US, a greater out-of-pocket cost to the patient, and therefore it becomes much more discretionary, and it is an area that we have seen a little bit of a shift towards more demand, for example, from our customers for value implants, and we believe we're well-positioned on that. We've been able to expand the product portfolio with BioHorizons through the S.I.N. acquisition we did in Brazil. They had an FDA-approved value implant that we were able to start selling in the US, and it has kinda filled out that portfolio a little bit.
You're seeing more and more general practitioners who are willing to take on implant procedures. They're typically gonna take on the more straightforward implant procedure, which means they're willing to work with a value implant. They're willing to work with a value system of implants. The more complex matters, when, if you've got a complex jaw structure or something like that, it's still gonna get referenced to the oral surgeon. But I think that's where we're seeing a little bit of a dynamic there, kinda shifting some things, and we think we're well-positioned for that. But it is more discretionary. You do see, you know, ups and downs with it more so than you do in, say, just general dentistry.
Okay. And then just quickly to hit on equipment, I don't know if you wanna bifurcate it between, you know, traditional and basic, but I'm guessing some of those same things can act as a tailwind on the equipment side, right? Certainly de novos and the need for equipment.
Absolutely.
Then what we should look to interest rates. I think I've tried to ask you guys this question on a prior call, but where's the tipping point? Like, what matters from an interest rate environment, where you could actually, you know, see, for lack of a better word, an inflection? I'm guessing it's not your 25 or 50 basis points. Is it 200? Is it 100? What matters there?
Yeah. I'll be honest with you, I don't know.
Yeah.
You know, it is. I don't think we're at that point yet. Let's put it that way. I think that the expectations in terms of what interest rates are gonna do seems to be moderating a little bit, and I think that might be putting, you know, maybe some pause. On the flip side, that could be good. You know, if people are waiting for rates to come down and they don't think they're gonna come down.
Yeah.
Then maybe they're willing to invest now, right? You know, so it there can be a counterpoint to that as well. In terms of equipment, you know, you're right. You do have to bifurcate between traditional equipment and digital equipment. They are two relatively distinct markets. Traditional has been fairly steady for us. And that's also been helped a little bit through, you know, service revenues that we get on our traditional equipment. Digital equipment, you still have some volatility. We're still seeing a little bit of volatility, for example, in scanner prices. You're seeing, you know, timing of DS World in the third quarter in terms of when some of that activity's gonna come through in the fourth quarter.
You still see, you know, perhaps, you know, I thought by now we might get a little better traction on 3D printers, but there's still, you know, I would say any practice out there who's buying a 3D printer is still seen as an early adopter at this stage. So there's still, I think, you know, some runway there in digital equipment, but it doesn't contribute to the volatility in that product category.
Okay. Very helpful. I'm gonna. I'll look out in the audience. Guys, if you have questions, throw your hands up. And if I don't see you, just yell out. But otherwise, I'll plow forward. Tom, I'm gonna pull an audible. I'm gonna go back to a 2025 construct in a little bit. But just, you know, CEO of the Healthcare Specialties Group, maybe just tell us. So you're heading up what? You're heading up endo, ortho? The private label? Maybe just give us a quick rundown there. And then importantly, you know, what's the goal? Is it to drive those businesses faster than the other, call it, which would be, I guess, the underlying distributor business and the implant division?
Yeah. So in general, we look at this as the high growth, high margin part of our business. And my responsibilities are for any product that we design, develop, manufacture, source, anything as long as we put an owned brand on it. Everything except implants and biomaterials. That's separate. So the key ones that you referenced were endodontics, orthodontics, and now orthopedics as well, because we are in the orthopedic implant business, specifically around the extremity side of the business, which is more focused on outpatient. But you know, these are areas for us that are the higher margin, higher growth segments of the business.
Okay. Is there a way to quantify how much higher those margins are? When you think about it, you know, and how much does it vary between, you know, the orthopedic business versus that of the endo business and the private label, etc.?
You know, our specialty businesses tend to have what I'll say gross margins that are consistent with market, right? And so if you look out at, you know, what others are doing, in implants, in orthodontics, in endodontics, it's gonna be consistent with market. I think, you know, typically, you're gonna see gross margins north of 60% on a lot of these products, right? Something like orthopedics, you know, which is really kind of, in some respects, folds in with our medical business because we see the ASCs, Ambulatory Surgical Centers, as a key customer segment for them, that will be accretive from a gross margin and an operating margin perspective versus, say, our core medical business, right? So we will get better margins in that business than you do, say, in core medical.
Same holds true with our home solutions business, by the way. The home solutions business, which is really, you know, focusing on providing supply to home healthcare providers, that is also growing faster than core medical at margins that are better than core medical as well.
Okay. Ron, maybe just to go back to you for a second and to push you for a moment. You know, we upgraded the stock roughly 13 months ago last October. I'd say there's two main tenets to the upgrade at that point in time. One was that you guys were gonna resolve the cybersecurity attack, and the headwinds would be less pronounced than what the stock reflected at that point in time. You know, and I think that's largely played out. The other one was, hey, you're this hybrid distributor manufacturer, and you're not getting full credit for it from a multiple evaluation perspective.
Is there any thought, you know, you can go through the 10-Qs, and you can get the margins or do a better job GAAP of TVAS, but it's still a little bit of, an unknown or a mystery of, like, that margin profile of dental specialties or even some products within medical. You know, the want or the thought behind, like, "Look, we're undervalued. Let's give some more detail here. Let's furnish the street consistently with a dental specialties margin profile, a TVAS margin profile, then we can all do the math on the implied distributor or if you wanted to give that," and let people take more of, like, that sum of the parts because, look, those acquisitions are costing you more to do at different valuations than if you were to buy a mom-and-pop distributor?
Mm-hmm.
So why not provide that to the Street and let us sort of get behind that and do the work there?
We have been providing, you know, some information around our dental specialties, you know, with our earnings releases. We do kinda talk to these things a little more so than we have historically. You know, your segment reporting is kinda dictated by GAAP as opposed to what you wanna do. But I do think that these are areas that, you know, as we kinda progress into, like, what we were like you were saying before, into this, you know, it's a greater hybrid of a business now. You know, it is an area that we continue to explore in terms of what is the type of information that we can be providing that might provide, you know, more valuable information to investors, and we'll continue to do so.
Okay. Fair enough. Tom, I'll go back to you. The orthodontic business, you know, Stanley referenced in the most recent call, there was some transitions taking place there. Maybe if you just wanna remind investors, what's taking hold as you sort of, you know, move from Reveal, off-Reveal, pardon me, and then how long will that transition take place?
Yeah. So just as a reminder, orthodontics is a smaller part of our business right now, but let's see, was it last year as part of the Biotech.
Yes.
Acquisition, they had an orthodontic business called Smilers, and it's just a clear aligner business. So the technology, the software in particular, was definitely a step up for us. So we're in the process now of transitioning our clear aligner business from the Reveal brand to the Smilers brand. We started that transition in some countries in Europe over the last three months, doing some testing work here in the U.S. right now, but intend to have it fully transitioned by the end of Q1 2025.
Okay. Great.
By the way, I mean, you know, I love what we're doing there. We haven't been able to get what I would say sufficient scale in orthodontics business to really kinda justify the infrastructure we had in place for it. Tom's done a good job of kinda coming in and saying, "How do I better leverage existing Henry Schein assets?" We had a discussion around, you know, we're gonna start distributing the orthodontic products from our distribution centers that we use for our dental and medical businesses. I still remember when he called and asked me, you know, when we were talking about it, and the first thing I said to him was, "What else you got that we can sell to the distribution centers?" Right? How do we get better leverage out of one Schein?
To help that operate more as a?
Absolutely. You know.
A specialty type of margin.
Absolutely. I think it is an area that we are looking at how to it becomes a bit of a beta, but there's already other things we're looking at doing and, you know, following that business as well. But it is with the orthodontics business. It is something that we, you know, until we get the scalability of it, we have to figure out a way to run it more efficiently, and this is kinda the first step towards that.
Okay. Understood. I said I was gonna dip back to 25 constructs. I'll ask questions that I think are high level, just to sort of put up some goalposts. So, Ron, in the most recent call, we'll go back to the LRP. The dental market, I think some of the numbers accompanying the LRP for dental was around up 2 to 4%. I think you alluded to maybe be at the lower band of that for 2025, but you also talked about the ability for ongoing market share gains, pardon me. And so, like, is that conservative enough? 'Cause if I look at the dental numbers year to date through the first three quarters, they're down low single digits internal, you know, roughly. And if you say up 2 to 4% with some share gains, it's harder to land further south than three.
So, like, is that the right place in your level of comfort that we can go from down low single digits for the first nine months of 2024 to up low single digits for the first nine for, pardon me, for 2025?
Yeah. Well, we are talking year over year. So I think that as we have sequentially over the course of the year, you know, picked up a little bit of extra margin each quarter, you know, a lot of this comes down to what's that momentum going into 2025. Also, you know, a little bit of price as well. What are we gonna see happening on price? Because right now, I think prices are fairly, you know, I guess you could say stable, meaning that you're not seeing a lot of price increases, right? You know, the 2% to 4% you referenced, that goes back to our investor day, which we did in February of 2023, where we did talk about what we kinda saw as our long-term CAGR in core dental being 2% to 4% growth rates in the market.
It's up to us then to try to, you know, increase that market share so that we can be more towards the high end of that, perhaps. Right now, what we're seeing in dental would suggest, I think throughout 2024, I would argue the dental market was pretty flat as a market itself. Are we gonna see a little bit of a lift into 2025? That's part of what we're still trying to figure out as we contemplate 2025 guidance.
Okay. Do you see the lift? And then you do have the conviction that you should be able to be a share gainer in that market.
Yeah.
For whatever it's doing. If it's growing zero or two, you believe your position to get some share.
I mean, that's what you're in business for, right? To take market share.
Yep.
You know, so yes, we have to assume that we can execute on that and get some market share.
And I wanna just go back to what you said earlier. Why would price be more prominent in 2020? I mean, I look across my other industries and contact lenses and animal health, and price has been pretty robust, but they're sort of implying price in 2025 might be a little less than 2024, 2023. I mean, obviously, as inflation has somewhat subsided, why would price be more prominent for you guys in 2025 versus 2024?
Why would it be or why would it not?
Why would it be? I thought that's what you might have alluded to.
What I'm saying, we didn't see a lot of price benefit in 2024.
Okay, so there's no.
You know, so I think it's more the comp more than anything else, right? But, that's not to say it's gonna be, "Oh, yeah, we're gonna get 5 points of price or nothing like that," right? It's gonna I think it's still gonna be a fairly modest, price opportunity in 2025 versus 2024.
Okay. And just maybe put up some of the moving parts for medical. So to go back to that LRP, that was a 4 to 7 or, you know, a healthy mid-single digit. Obviously, you guys have been south of that. Maybe Tom, this brings you into the play in terms of some of the initiatives you guys have with, you know, your own private label business. But what are some of the factors that can help accelerate that? 'Cause I believe you're still experiencing a little bit of a trade down to generics in that part of the business.
Yeah. Well, and that should annualize on some of the more principal pharmaceuticals that we sell.
Going into 2025, that will annualize?
Yeah. You know, so, you know, the pharmaceuticals we sell are limited to those that are administered in a physician's office, right? We don't, we're not selling statins. We're not selling blood pressure pills. We're, you know, it's typically injectables that have to be administered in a physician's office. We have seen some of those products in the last year go off patent, and we have been able to sell the generics, but that kinda impacts your top line a little bit with them. I think we're, you know, we are seeing lighter traffic into the physicians. We mentioned this on the call, on the third quarter earnings release call. I think McKesson has kinda made similar references.
We don't know if it's fewer people are getting sick or fewer sick people are going to the doctor, but there does seem to be, when you look at things like demand for point-of-care diagnostic kits, the kits that the doctor will administer to test you for flu, to test you for COVID, to test you for strep, you know, those, those are fairly moderate right now. So that is an area that, you know, that over time we're kinda closely monitoring the flu season. You look at what's happening in the southern hemisphere on flu, what's the timing of flu season gonna be? We're still thinking that there could be kind of a later flu season that could be beneficial, but you have to see how this plays out a little bit. We're monitoring the CDC site like everybody else is on that right now.
Okay. Okay. I'm gonna shift gears. We've got about seven or eight minutes left. Restructuring. You completed the restructuring initiative that you originally undertook in late 2022, and now you've got the new restructuring plan. I think the new one's looking for, you know, about $75 million to $100 million in annual savings by year in 2025. I feel there's always, like, the, you know, the number, and then there's the net number. So is there a way to think gross to net and how that might look for calendar 2025?
Yeah. It's always kinda hard because you're always investing in the business, right? So how much of this is reinvestment of cost savings versus money we would've invested anyway? So it's always a little bit difficult to really kinda specify how much of that 75 to 100 would absolutely fall out to the bottom line. But I, you know, we do want that to be beneficial to the bottom line. You know, I think the investments we're making in the business are, you know, arguably investments we might have made anyway, but it gets easier to make those investments if you can find cost savings elsewhere. So is there going to be a complete one-to-one on that, on the savings?
We'll have to kinda see how things play out and where the need for investment is going forward, but you know, orthodontics is an example of an area where we saw an opportunity to kinda restructure that business, save some money, and you know, we've done so. We've taken a look in a few other areas as well, and some of this too is just you know, as we saw a little bit of pressure on the distribution business coming out of the cyber attack, kinda right-sizing some of that distribution business. That's been a big part of the restructuring also.
Just to be clear, it's $75 million to $100 million sort of annualizing run rate, exiting.
Exiting 2025.
2025. So.
Correct.
I mean, is that wildly back-end weighted, or you're making changes as we speak?
No. I mean, we, you know, executed on a lot of initiatives throughout the third quarter, and we continue to do so in this quarter. So, I think we had said in our earnings release that the annual cost savings that we estimate from the initiatives that we completed in the third quarter would provide about $50 million of cost savings in 2025.
Okay.
So there, you know, we, we've already, you know, let's put it this way. We kinda went about some of the what I'll call kinda easier things. Other things we're gonna do might be a little more complicated when you're talking about, you know, moving operations from point A to point B, or if you're talking about combining some operations, that takes a little more planning, and that'll take throughout 2025 to execute.
Okay. So maybe just a handful of questions left. And help me out with this, Ron, because at the end of the day, when I have your model in front of me, it's like I've got my top line, and then whatever I'm doing with that OM is what wildly swings that EPS number. You know, is it 15 bips or 20 or 25? So if I think about 2025 again at a high level, you've got the restructuring initiative, you know, some of that's already in play, call it. It will work its way higher throughout 2025. You also have some of the specialty businesses that you bought that might have been varying levels of accretive in 2024 was the initial plan, but I would think the level of accretion of those businesses would accelerate further in 2025. What are the headwinds or what's working the other way?
Because that seems to point to decent OM expansion for 2025 versus 2024 based on what I just laid out.
I think in terms of headwinds, you know, we are launching our global e-commerce platform. We will take on some additional depreciation expenses that goes live in 2025. That's something we have to contemplate. There's ongoing investment in the business. You know, the geography of our P&L changes up quite a bit when you get more and more into self-manufactured product. You got a little more R&D costs. These things can get a little lumpier, a little less predictive sometimes from, you know, from period to period. So, you know, that does add to the volatility of our P&L versus when it was primarily distribution. So you can get a little bit of that. But, you know, we've got a few other things in 2025 that we'll have to try to manage and, you know, cost-wise.
But it is, you know, a lot of this comes down to you're talking about top line. What kinda momentum can we get through the end of 2024, into 2025 so that we can, you know, fund these things with a more healthier top line?
Okay. Two or three more. Tom, I'll go back to you. Maybe just the organization's ability or breadth to take on additional deals, right? I mean, you guys have really good free cash flow. We saw an outsized number of deals in 2023. It's somewhat moderated in 2024. Ron, maybe I'll go back to you on cap deployment plans for 2025. You know, I mean, clearly there's this push, you know, bolt-on of higher margin businesses, maybe more Schein private label. So when you look across what you're running, and you just brought in a lot in 2023, even though most of that was implants, but the organization's ability to take that on effectively.
Yeah. So, A, we're always looking for opportunities there. There's a pretty robust pipeline that we're always evaluating and looking at. We spent a lot over the last 12 to 18 months, right? So we're in the process now of integrating and bringing those products in and leveraging those opportunities. So we're kinda getting to the tail end of that where we're looking at other opportunities now, and I think we have the capacity to take on a few of those and leverage a few more opportunities. So.
I would add to that too that, and this is especially applicable to some of the businesses that Tom looks after. We, you know, one of the areas of investment that we have executed on in 2024 has been buying out some of our minority partners in certain subsidiaries that we have. And what that's allowed us to do is allowed Tom to kinda treat, for example, in the endodontic business, we kinda had almost a portfolio approach of different endodontic businesses that we're operating 'cause you had different minority partners in a couple of those businesses. Now that we've gotten to 100% ownership there, we can treat it more as a singular business, right? as opposed to a portfolio approach.
I think that's where we can really begin to kinda leverage the Schein name, use our you know the strength of our sales force to help promote those products more so. So it that's been a very important part of our strategy as we've gone to 2024. As you said, 2023 was a very heavy year, very heavy lift for us in terms of acquisitions. 2024, we really needed to focus on integrating those businesses. But you know when you go out and buy out minority partners, it's fairly efficient. You're not doing due diligence. It's an efficient.
Don't you got?
Yeah. It's an efficient process of getting there, and that has been, I think it's something that is really positioning us well, I think, to accelerate growth going forward.
One of the things that I think people did like in the most recent quarter was, again, the implant performance, and maybe in the last minute we have, Ron, over to you. Just, you know, one quarter doesn't make a trend, but you've got a new product there. You mentioned the move overall to value. You mentioned GP uptake on implants. All those things would seem well suited for Schein.
Yes.
You know, your conviction that the recent share gains can continue and even further out when we look over the next one to two years, how do you capitalize on those trends, move to value, maybe playing into your portfolio and GP uptake on implants?
No, the move to value is, has been important for us in terms of, well, BioHorizons isn't necessarily a, I would call it a value implant. We, we've kinda characterized it more as a sub-premium implant. And so it is price competitive with premium implants. And, you know, as you mentioned, we had about mid-single digit growth in North America and in Europe on implants, you know, in the third quarter. We're pretty certain that the markets are not growing at that rate right now. So we feel pretty good about, you know, that we're getting some market share. I think it's the strength of the portfolio.
You know, and part of this too is beginning to execute on some of the acquisitions we did in 2023, S.I.N. in Brazil, Biotech in France, you know, in terms of, you know, giving us some scale in that product category as well.
Okay. Fair.