Good morning, everyone. Welcome to the latest session for the Leerink Global Healthcare Conference. I'm Michael Cherny, the healthcare tech distribution analyst. It's my pleasure to have with us, Henry Schein, CFO Ron South. In the back we have Graham Stanley and Susan Znaufer from the IR team.
I'm happy to say that Ron brought no slides, so we're just gonna jump right into questions. I might as well start with a little bit of a joke since we were just joking about this. You have your first new CEO since the first Bush administration. I know it's been a week, so I'm not asking for strategy, but what about Fred's role, Fred's leadership brought him to Henry Schein, and what gets you excited about his skill set to bring to the next evolution of the company?
Yeah. Thank you, Michael, and good morning everybody. Yeah, I know we were chatting beforehand. I said, you know, it this is Last week was an unusual week for us. I think everybody who works at Henry Schein has had one CEO, right? Everybody who is currently there. Last week we had, you know, a new CEO.
Henry Schein's been in existence for 94 years, and Fred Lowery is now our 4th CEO in 94 years. It says a lot about the, you know, the culture of the company, it says a lot about the values and how we expect that to continue. Fred brings, you know, a very fresh perspective for us that I think will be very beneficial.
He brings a lot of operational excellence. I think his track record in terms of what he was able to accomplish while at Thermo Fisher speaks for itself and, I think we'll benefit from a fresh perspective. I think all of us know, in any kind of role, doesn't have to be a CEO role, it can be multiple different kinds of roles, when a new voice comes in, when someone brings a fresh perspective, it does...
It can be energizing and it can be something that, you can turn something that goes from uncertainty to really being a positive. In the meantime, we very much benefit from Stanley staying on as chairman. We're not losing that legacy knowledge. We still get his insights.
I think that, you know, we can, we can find the best of both worlds there. You know, Fred is a, by trade, is a mechanical engineer. Mechanical engineers are adept at solving problems. They dig into problems, they find the one thing, they dig into that detail, they find that one thing that makes something not work well.
You can see that in his style already, just the way he... We spent a lot of time with him last week, as you can imagine, and you can just see it in the way that he asks questions. A very curious mind. I think we're all looking forward to it.
We'll give you till next week for the new strategic plan. Maybe level set on the business. You know, 4Q, if you think back recently, you, your peers seem to show signs of call it stable to improving...
Trends across the dental market. You know, where do you see the markets as you see them right now. Where do you think for Schein as a whole, you're at least maybe talking the equipment and consumable side, talking especially after you're outgrowing versus potentially undergoing the market?
Yeah. I think that, you know, there is a, at least a slightly more positive tone to the market. You see it in some of the earnings releases that have come out from others in the, in the dental space and, you know, we're watching things carefully.
Silicon traffic is a bit of a barometer in terms of what's happening and opportunity on the merchandise side and that's stable and perhaps, you know, getting a little more positive. You know, three years ago when we did our investor day, we said then that our assumed, market growth on core dental, to your point when you're just talking about kinda core merchandise, core equipment, was in that 2% to 4% range.
I think we're probably still a little light of that 2% range, but we're above where we were, right? I think we're above where we were the last few years. In the meantime, I think that, you know, as opposed to sitting around waiting for the market to grow, we're doing everything we can to take market share.
We were pretty aggressive last year in creating some customer relationships through some discounting we did in the middle of the year that began to show up in our sales growth in the third and the fourth quarter. In the fourth quarter, especially on the equipment side, we saw very good growth and we're very confident that those growth numbers exceed what's happening in the market.
It's really a in some respects, a show that we're trying to put ourselves back on offense here a little bit, right? We caught ourselves playing a lot of defense following the cyberattack in 2023, and we really have shifted gears to be more on offense now and be more aggressive in terms of picking up, you know, market share, in terms of, you know, hiring some experienced reps, you know, to help us accomplish that.
That has really helped. In the fourth quarter on the equipment side, we partnered, you know, with some of the manufacturers, had exclusive promotions with them, where we shared in some of the cost of the promotions with them and, you know, in the end, really saw, you know, great success from that.
Those are the things that if in the absence of more aggressive market growth, and while to your point, I think there is a slightly more positive tone, in the absence of getting back to kind of those historical growth levels, we have to take, you know, be more the catalyst to drive more growth internally.
The equipment side, I think, was the particularly pleasant surprise, not because of anything Henry Schein has done wrong, just the market has felt heavy.
Yes
On equipment. As you thought about the partnership promotional strategies, how did you make sure you were picking the right partners so that as you went into the market to push, even using promotions, but you were pushing products Your customers felt like they needed.
Yeah. Well, it's just really more from a feel for where are we seeing the most popularity of some of these products with our customers, getting feedback from customers. I think that was, you know, really the driver of how we, how we partnered up.
To your point, is the growth we really felt like it, that growth we saw in the fourth quarter in equipment is a bit of a bellwether for us in terms of the confidence the practitioners have in investing in their practices. Most of that growth was driven by standard equipment. By standard equipment, we mean the chair you're sitting in when you're being treated by the dentist.
That often means they're adding a chair to their practice or new practices are being built and putting in chairs. That's a sign we see as an opportunity for slightly more expansion to the supply of dental services. That expansion of dental services grows that end market, which, you know, is an opportunity for growth for us going forward.
Might be bad for the duct tape market, in terms of chair replacement. It has... You had those discussions because clearly, like you said, you're seeing some signs of stabilization, but you still have a practitioner group maybe outside the DSO's that have varying degrees of financial uncertainty, still.
Elevated interest rates on funding equipment. How informed are the discussions that your sales force is having with your clients on the macro? What are the push and pulls on whether they buy or don't buy your clients are telling you about where their macro concerns most lie?
I think, you know, from a macro perspective, you know, interest rates have some influence, but I don't think it's not a real strong direct correlation that you see. Obviously, if interest rates were to have a fairly healthy drop in rates, you could see, you know, some positivity to the equipment sales coming from that.
It tends to, you know, not move as much as one might expect based on that change in rates. What we see as being. You know, we've always said a typical barometer of what is, you know, good for us and good for our customers is access to care. The more people who have access to care, the more traffic you get going through not just dental offices but also physician offices.
One of the macro factors we look at closely is unemployment rates. If unemployment rates are staying, you know, relatively modest, which they have, that means, you know, there's more people with dental insurance, there's more people with access to care, and that, you know, will at least maintain a consistent level of foot traffic into the practices.
I think that's the macro we look at, you know, most closely. In terms of what do our sales reps in the discussions they have with their customers, I don't know how much they get into that type of indicator. I think it's. Their discussions with the practices really focuses on how can you see more patients in a day? How can you know, develop greater administrative efficiency and operating efficiency in your practice?
That's where we've really been focused is, you know, what are the pain points? What are the things that burden your office in terms of getting work done? How can we provide you with the tools to drive that efficiency? I think that's probably the primary discussion that you see you know, with our customers.
As you think about your growth relative to the 2% to 4% targets...
Yes
In a market that maybe doesn't support as much, in talking about going the offensive, how much has your breadth with DSO's played into your scale advantage in order to try and outgrow the market?
Yeah.
How important is the role of the DSO's on the merchandise equipment side in terms of that equation?
Well, it's very important in both, but I think especially on the equipment side, because I think some of the equipment growth we saw in the fourth quarter was the direct result of a little greater de novo expansion from some of the DSO's. We did see, you know, some sales into some new practices related to that.
The DSOs, you know, are growing, you know, marginally faster, and they have consistently every year for quite some time now than, say, the rest of the market. We do have of the 27 largest DSOs in the U.S. 25 of them consider us to be their primary distributor. If they're growing a little bit faster, we're gonna be continuing to take market share as well.
Got it. I know historically there's been the push and pull with the DSO's in particular on your ability to add value by third-party manufactured products. Like, you know, typical with any customer base of any industry, larger the client, typically the more pricing that they might try to push on.
Your trade-off has always been, "Well, we can sell you lower priced products where we make a better margin." Like, how much does that continue to play into your role with the DSOs and your ability to add value?
No, it's very important. You have to emphasize that added value, because if you don't, it becomes a transactional relationship. You know, a transactional relationship of who can sell me gloves and cotton balls cheaper than somebody else, and that's, you know. I don't think that's a business any of us wanna be in, right?
It has to be more, how can we help you drive profitability in your practices? Sure, we'll try to give you competitive pricing on the merchandise. We'll try to get you competitive pricing on the equipment. By the way, we also have the most robust and sophisticated approach to servicing equipment than anybody else has out there.
When your chair goes down and you're, you are a Henry Schein customer, you're gonna be prioritized and your chair is gonna be fairly quickly, and the lost revenue is gonna be minimized. Beyond that, you go to specialty products.
Here are some things you can be doing to increase revenues in your practice if your GPs are willing to expand into specialty areas such as, you know, implants or endodontic procedures. Those are all areas that we can address as one, you know, with our DSO customers, and we really try to drive That strategic alignment with them as opposed to the transactional relationship that comes with just selling, you know, goods to, you know, to a practice.
Maybe if we can shift to the specialty segment business for a bit. It's grown fast, it's kind of, I don't wanna say come out of nowhere 'cause that's not the case. I know at the last investor day, it was a key highlight of the strategy going forward.
If you can break apart the businesses, where do you think you sit across ortho, endo, implants right now from a strategic positioning and where do you see the biggest value add from your product portfolio relative to what was missing in the market?
I'll start with implants 'cause that's the largest of our, of our specialty products. You know, we have our estimates are that we're number two in the world, I'm sorry, number three in the world on implants now, ex-China, because we do not have a, you know, a big presence in China with implants.
We've got a strong presence in Europe, where we are seeing, you know, good kind of mid to high single digit growth on implant revenues. In the U.S., the growth has been a little lower than that, but we still feel like we're being competitive in the U.S. I think what has been interesting to see when you look at the implant markets is, you know, I think a greater shift to value implants.
You know, by value implants, I think something that can be sometimes misunderstood there is that a value implant is gonna look the same as a premium implant for the most part, but it is often the services, the surgical services you get associated with that, whether it be surgical planning or otherwise.
Value implants have become very appealing to more and more general practitioners who are interested in doing that straightforward single implant. That helps us, I think we talked about, in working with our DSO customers. Our DSO customers like having access to that value implant.
When we bought S.I.N. in Brazil in 2023, they had an FDA-approved value implant that we've now launched in the U.S. and we expect to, you know, get some growth, some better growth in the U.S. as a result of that launch. It is a When you, when you look at implants, you really have to break it between, you know, kinda outside the U.S., in our case, Europe versus North America, and then also premium, you know, versus value.
On the endodontic side, we believe we're number two in the world on endodontics. Very steady business, tends to not have a lot of what I'll call, you know, economic elasticity to it. When people need a root canal, you get a root canal. It's not something you typically defer.
An implant you can defer, so it is a very steady business. It really comes down to creating products that, that the practitioner can use easily, can provide them with some efficiency, so we're very happy there. That's been kind of a nice steady kind of mid-single digit grower for us over the last couple of years.
The last one you mentioned was orthodontics, which has been a, you know, a pretty small play for us. We're still less than $100 million of revenue there. I would argue there might be only one company out there that's making money on clear aligners, but, that's a discussion for another day.
I think that, you know, we have really cut down, we now are leveraging existing infrastructure to market and sell our orthodontic products, and we think it's working out to be a very, you know, good plan for us, as opposed to trying to expand it into, you know, a much larger business. We do have some DSO customers who like our offerings on orthodontics, and we primarily serve them.
Maybe just to dive in specifically on implants, 'cause it was big market share. You talked about the product launch in the U.S. As you think forward, like what is the scale that you're trying to achieve on the implant business within the broader Henry Schein?
It's like how strategic should this business be over time? Not necessarily just to growth, but also to your position in the market, to your position with customers. Are you trying to displace, you know, a couple of the leading vendors, or is this just an alternative? Like again, just trying to think about where this business should sit going forward.
Yeah, I mean, I think that, you know, it's probably best to look at it, you know, more holistically than that. You know, we've talked about our high growth, high margin businesses, which are really the, you know, kind of the three specialty dental businesses that I just listed, plus our technology business, you know, Henry Schein One, as well as some of the value-added services that we offer through our distribution segment.
Those products and services collectively account for, I'll use round numbers, about 20% of our revenue, but last year provided around 45% to 47% of our operating income, of our non-GAAP operating income. We have a goal of exceeding 50% by the end of 2027 with that.
I think, you know, where do implants fit into that? They're gonna be leading that. They're one of the biggest product categories, if not the biggest product category within that segment. I don't think it's a question of, well, we're gonna really try to go change the value implant market.
I think it's, you know, we're looking for ways to actually expand that market, and we think value implants helps expand the implant market. If we can compete in that area, then I think it's an area that will just help kinda drive that continued growth of those high growth, high margin products, which the significance of those products is that we own all of those products. You know, we own those brands, we own those products.
That's not a situation where we are distributing on behalf of somebody else. Those are all brands we control including, you know, on all the implants. I think they'll help drive some of that for us, but I wouldn't say that it's necessarily, well, we're gonna go after one very specific piece of it. It's just what can we do to help expand the market itself?
Shifting a bit to the technology side, Henry Schein One, I don't think it's gonna be a Fireside Chat, this conference, without asking something about AI. You've had some interesting work you've done on the digital imaging side, and a partnership with AWS. Can you maybe just encapsulate your vision, your strategy, or your at least minimum touch points on AI-oriented functions right now?
Certainly. The agreement we have and the partnership we have with Amazon, specifically AWS, is, you know, really exciting for us. It allows us to take some of AWS generative AI capabilities and work it into our Henry Schein One platform, specifically Dentrix Ascend, and outside the U.S., Dentally.
This really allows us to, I think, provide some add-on services to our customers that really address some of the pain points they have and do it in a very efficient manner. Even just recently, we launched both Voice Notes. Two products. One called Voice Notes and one called Image Verify.
Voice Notes allows the practitioner to simply talk out loud while seeing the patient. It goes beyond just dictation, or else it wouldn't be intelligent. It really takes what the practitioner is saying and updating the patient records and sorting it and making it a more efficient process so that when the day is over, the practitioner is sitting down and trying to update all the files for what they did that day, it takes about a two hour task out of, you know, out of their hands.
Equally with Image Verify, we just is a product that we recently launched. That is a product that will using AI, will assess the quality of an X-ray and alert the practitioner if they believe the quality of that X-ray will not be accepted by the payer, by the insurance payer.
The problem with that is if you send in that X-ray and it's a little blurry or whatever reason, it gets rejected, the patient's out of the chair at that point. You gotta bring the patient back, you gotta get the X-ray. If they get that immediate warning, this is, you know, this particular image will likely be rejected, they can do the X-ray again right there while the patient's in the chair.
To again, takes away a lot of the administrative burden and a lot of the inefficiencies from the practice. Those are just examples of that. In the meantime, you know, a lot of our product development is being done, you know, with the use of AI in mind as we do this, right? What can we do? What are the other pain points that the practices have, and how do we build that in?
Along those lines, how is the development process developing? Is it push versus pull? Are you thinking about things that you see, or is this customers coming to you? It's, I mean, you have such a strong market penetration...
Yes
With Dentrix as a whole. It's the operating system for the vast majority of dentists in the U.S. especially. Like, how does that interplay move, relative to the R&D that you're putting in through the platform?
I would say it's both, actually. I mean, you know, we're constantly trying to understand what are the pain points in our customers practices, and then when we see those, it's like, what can we do to make, you know, to take that pain point away from them?
You know, something like Eligibility Pro. Eligibility, you know, there's, in the U.S., there's about 2,000 different dental plans. If you're sitting in the chair and a dentist identifies a problem and says to you, "Look, there's an issue here. We can treat it right now," 99% of the time, if you ask that dentist, "Well, how much... What's my out-of-pocket gonna be on that?" They don't know.
You're gonna get patients to say, "Well, I, until I know how much I gotta pay, how much my insurance is not gonna cover and I gotta pay, I can't do the treatment." Eligibility Pro, they have an answer. They will have an immediate answer for that, you know, for that patient under those circumstances.
You keep the patient in the chair, you get the treatment done, you get the revenue stream from it. You know, that was always. You talk to any dentist in terms of having to go call the insurance company, try to get the information, try to explain what the procedure is, you know, very, you know, time-consuming. That's just one example.
There are other things where we see, you know, like you said, you know, in terms of what can we kinda push to them to say, "Have you thought about this? Here is something that will help your practice become more of a digital practice. You know, less of an analog, more of a digital practice. Here are some tools that are available to you to do so.
Maybe, turning operationally in the value creation plan, I feel like this time last year it was very much in discovery process.
Yes.
Now we're in realization process. You've been very vocal and transparent about how to think through the transition and the dynamics over the course of 2026, investments versus realization. Like, how are you marking yourself on the checkpoints? As you think about opportunities versus cost to invest, like, where do you see, like, you have the most visibility into making sure that you hit your success metrics?
Yeah, no, it's a great question, and obviously, it's a high priority for us right now, right? You know, this is, you know, really gonna be a driver of operating income improvement for us going forward. The, you know, the projects that we have in place and the project plan we have in place, really is you know, starting to formulate, as we speak.
You know, as we look at the phasing of this plan. What we indicated was that by the end of 2026, we think that the work we will have completed at that point, will deliver $125 million of operating income improvement going into 2027. It's going to be annualized, run rate of those projects going into 2027.
Sure, there's some investments we're making over the course of this year. We're contemplating that. Well, that was contemplated in our guidance this year, and it'll be and it's contemplated in that net $125 million benefit as well, right?
So, you know, it does impact our earnings to the extent that we may be making a little bit of investment and adding some costs on in the first half of the year, but we're confident we're gonna see net benefits on that in the back half of the year. You'll see greater... We mentioned on the call a couple weeks ago that we expect, you know, the earnings growth to be a little more heavily weighted to the back half o f the year than the first half of the year.
These are all. The whole, I mean, the whole organization is part of this. There's two work streams. There's one around G&A, there's one around gross profit optimization. They're all gonna kinda come together and we'll, we, you know, we feel like can drive the, you know, our, the growth, you know, to the goals that we have.
This seems like a very offensive move that you're making versus for a company that historically has looked for optimization efforts at times.
Yes
Multiple restructuring programs. Obviously you have partners here, but how is the tenor different in terms of the internal processes being put in place to realization versus potentially past restructuring programs?
I think this one is much more structural in its design. You know, historically, we have addressed restructuring needs more at a grassroots level. You go to each individual business, you try to determine where can we take out costs? Where can we combine some departments? Where can we do things where we might have 12 people, can we do it with 10?
What are some things we can do? This is much more top-down. This is much more across our businesses, how can we share resources more efficiently? What tools are available to us, you know, technological tools that we're not perhaps optimizing right now, and how do we deploy those tools?
It's much more structural and in my opinion, will be much more permanent and more difficult for the cost to kinda creep back in, like perhaps we've experienced a little bit of in the last several years.
I don't wanna run out of time before discussing the medical business.
Yes.
Heard the last couple quarters a lot more discussion on the at-home dynamic.
Yes
And patient direct, use your term. How do you think about the strategic positioning of medical now? As you think about the at-home opportunity, what's the most exciting and appealing part of why you're expanding there?
I think, you know, our medical strategy has consistently been follow the patient. I think it was probably about 20 years ago that we kinda got out of the hospital business, right? Where we saw more and more patient procedures leaving hospitals being done more in the ambulatory surgical centers, being done in physician offices.
And quite frankly, our logistic abilities were much better geared towards that smaller order that could be delivered to a smaller office. We've really focused on our strength and followed where the patient procedures were going.
Those procedures have since also begun to include more and more, you know, care that people are getting at home. We began partnering with more home health providers. Like we're not in the home healthcare business, but we are providing, we're supplying those home health providers, right?
We made a couple of I think timely acquisitions, you know, created a holdco for our, we call it our Home Solutions business. Created a holdco for our Home Solutions business that allows us to start folding in additional businesses there.
That's now got a run rate that's in excess of $400 million a year top line. It grows faster than our core medical business. It's more profitable. It has better margins than our core medical business. We really see that as an opportunity for us going forward.
You know, beyond that, you know, we still see a shift of more and more procedures into the ambulatory surgical centers and that's good for us. That just kind of increases the traffic there as well.
Along those lines, how do you feel that you're positioned from product availability at this point in time? I mean, it should be fairly straightforward, I think, but is there any push or pull on expanding on maybe equipment in any of those areas, or are these gonna be primarily still heavily consumables, merchandise-oriented businesses?
I think there's, you know. It's going to be more the latter. I think we're gonna continue to focus more on the consumable merchandise piece. Once you get into DME, it can be a little more complicated. That's not to say we don't always monitor the, you know, what the opportunities are there.
I think, you know, the closest to DME we've gotten to is kind of the continuous glucose monitors, right? In the meantime, it synergizes fairly well with some of the products, some of the wound care products, some of the other products that we sell through our medical, our core medical business, that we can also have, you know, similar products available in the Home Solutions side as well.
Well, I think we're just about out of time, if I can see that number, blaring. Ron, as you embark on the new leadership team, obviously, thanks so much for keeping us.