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Henry Schein, Inc. (NASDAQ:HSIC) Q1 2024 Earnings Call Transcript

Henry Schein, Inc. (NASDAQ:HSIC) Q1 2024 Earnings Call Transcript May 7, 2024

Henry Schein, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to Henry Schein's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Thank you. Please go ahead, Graham.

Graham Stanley: Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the first quarter of 2024. With me on today's call are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will include information that's forward-looking. Risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements, and the company's performance may materially differ from those expressed in or indicated by such statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings.


In addition, all comments about the markets we serve, including end market growth rates and market share are based upon the company's internal analysis and estimates. Today's remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures.

Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the Financials and Filings section of our Investor Relations website under the Supplemental Information heading. And also in our quarterly earnings presentation also posted on our Investor Relations website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 7, 2024. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, during today's Q&A session, please limit yourself to a single question and a follow-up. And with that, I'd like to turn the call over to Stanley Bergman.

Stanley Bergman: Thank you, Graham. Good morning, everyone, and thank you for joining us. Our first quarter financial results reflect solid earnings, driven by gross profit -- gross margin expansion and strong recovery from last quarter's cyber incident. We estimate that the incident lowered merchandise sales growth by low to mid-single-digit percentages during the quarter. On PPE products, sales continued to decrease primarily due to lower glove prices for the last year -- from the last year. We estimate a reduced impact on sales growth from PPE as the year progresses. We're very pleased with the progress we're making on executing our BOLD+1 strategic plan, and we are pleased with the contribution of our recent acquisitions.

These acquisitions contributed to the profitability we achieved in the first quarter. We are affirming our expectations for 2024 non-GAAP diluted EPS and 2024 adjusted EBITDA growth and tightening our expectations for 2024 total sales growth. Our projected sales growth reflects continued recovery from last year's cyber incident and a strong pipeline of new specialty products and software innovation. So let me turn to the review of our business units and start with dental on the distribution side. In North America, patient traffic to dental offices in January and February was impacted by weather events and by seasonal viruses, including the flu, but improved beginning in March. Overall, we see steady dental merchandise sales improvement throughout the quarter, reflecting this trend, which has continued into April.

In the U.S., our THRIVE Signature program is contributing to sales growth and membership continued to increase with about 2,000 new members added in the first quarter bringing the total number of THRIVE Signature members to approximately 5,000. For monthly subscription, this program provides a package of services to customers such as free shipping, discount on product and services and THRIVE reward points, which, of course, in the aggregate drive customer loyalty. International merchandise also experienced steady sales improvement in most markets as the quarter progressed. Sales growth was negatively impacted by two less selling days in most of the international markets. Global Dental equipment sales were consistent with the prior year and were favorably affected by a shift in sales in the United States from late 2023 into the first quarter.

Equipment sales grew in North of America but decreased slightly internationally. So now a few comments on our dental specialties, the global dental specialties business. We had a strong growth across oral surgical products, endodontics and orthodontics largely driven by acquisitions, and we believe we also gained market share organically in the Global Dental specialties market. The North American implant sales were largely consistent with last year. And international sales under our leading BioHorizons Camlog brand were very good, and this was especially good in Germany. In the first quarter, international sales benefited from the introduction of Easy 2.0, our value implant system in Germany, which is also designed for ease of use. We expect the launch of a new BioHorizons implant system in the U.S. in the second half of the year and early next year in Canada.

This launch will be for a new bone-level implant with a deep conical connection and is based upon our proven Camlog technology. We expect this will expand our addressable market significantly in the United States, thus increasing implant sales growth in the second half of the year. So along with the introduction of Simi Valley implants, this launch will position the company well in all market segments in North America. We achieved good growth sales during the first quarter as we launched our Edge branded products through the Henry Schein U.S. distribution business. Although orthodontic product sales are relatively small part of our specialty product sales, the launch of our Motion Probe Bracket System is performing well and specifically addressing the exploration last year's motion product preference.

We also launched the biotech Smilers, Clear Aligner and clinical, digital workflow software at the American Association of Orthodontics meeting last week, both of which have already been successfully launched in Europe through Biotech Dental. Let me now turn to the technology and value-added services businesses. We're the largest component is Henry Schein One, our dental software business. The customer base for Dentrix Ascend and Dentally, our cloud-based solutions continue to grow and increased 36% in the first quarter over the prior year, and now we have approximately 8,000 installations of our cloud-based systems. We achieved solid growth in our revenue cycle management e-claims business despite the impact of Change healthcare impact of their cyber incident.

This was due to the Henry Schein One team's prompt responsiveness to establish an alternative approach to processing customer insurance claims. Within 48 hours, we successfully were processing claims and backlog through an alternative clearing house. We are very pleased with the team's approach on dealing with the Change Healthcare cyber incident. And this helped us navigate a challenge for our customers, and I might add many new customers that now have turned to Henry Schein One for help during this challenging period for Change Healthcare. Although we believe overall technology sales were impacted by the Change Healthcare cyber incident, we expect sales in the second quarter to return to more normalized growth levels. Turning to the Medical business.

There was a strong contribution from sales of point-of-care diagnostics, including flu and multi, that's a flu COVID combination test and a shift in sales towards lower-priced generic pharmaceuticals in our medical business. Our North American Rescue business, which provides first responder and military medical solutions as well as our Home Solutions businesses performed well during the quarter. We also completed our acquisition of TriMed in early April strengthening our medical group's deep and long-standing relationships with IDNs, ASC and orthopedic specialist customers as we expand our offering into the orthopedic marketplace. Finally, we are pleased to share that late last week, we hosted our fourth Annual THRIVELIVE event in Las Vegas and had record attendance this year of nearly 1,500 attendees with significant support from our suppliers.

This is primarily an education event where our customers gain continuing education credits through seminars in the largest -- in the latest innovation and clinical dentistry, including digital equipment and software. This year featured the launch of some new innovations to help our customers attract new business, such as our new Dentrix eligibility Pro module that automates the delivery of claims eligibility data directly into the practice management software system. We believe this is quite a unique software feature. And I'm particularly pleased with the integration was Reserve with Google, a new product that we also launched at the THRIVELIVE event. This enables consumers who search on Google to make dental appointments directly from the pro -- from their Google business listing into our customers' practice management systems and schedulers.

A close-up of a patient's mouth, the dental products from the company in view.
A close-up of a patient's mouth, the dental products from the company in view.

These advancements support our continued commitment to driving innovation in the industry with products and services that add value to our customers' dental practices, enabling our customers to operate in more efficient practice while actually providing better clinical care. Let me now turn over the call to Ron to discuss our quarterly financial results in a bit more detail. Thank you very much.

Ronald South: Thank you, Stanley, and good morning, everyone. As we begin, I'd like to point out that I will be discussing our results as reported on a GAAP basis and also on a non-GAAP basis. The items excluded from our first quarter non-GAAP financial results for 2024 and 2023 are detailed in Exhibit B of today's press release. A reconciliation of our GAAP to non-GAAP income statement is also available in our quarterly earnings presentation on our website, which includes the non-GAAP effects of adjustments on noncontrolling interest. Also, please note that for most international businesses, the first quarter had two fewer selling days than the first quarter of last year. With respect to sales, I will provide details of total sales related sales growth and LCI sales growth, which is internally generated sales in local currencies compared with the prior year and excludes acquisitions.

Turning to our first quarter results. Global sales were $3.2 billion, with sales growth of 3.7% and LCI sales decreased 1.8%. Please note that our sales growth for the quarter reflects the residual impact of the cyber incident, which we estimate reduced sales growth by approximately 300 to 400 basis points. In addition, lower PPE sales, primarily due to lower glove pricing, reduced sales growth by 60 basis points. Our GAAP operating margin for the first quarter of 2024 was 4.72%, a 101 basis point decline compared with the prior year GAAP operating margin. On a non-GAAP basis, operating margin for the first quarter was 7.11%, a 57 basis point decline compared with the prior year non-GAAP operating margin. Gross margin improved 32 basis points primarily due to the contribution of businesses acquired in 2023.

Operating expenses were higher as a percentage of sales, primarily due to lower sales at our distribution businesses. First quarter 2024 GAAP net income was $93 million or $0.72 per diluted share. This compares with prior year GAAP net income of $121 million or $0.91 per diluted share. Our first quarter 2024 non-GAAP net income was $143 million or $1.10 per diluted share. This compares with prior year non-GAAP net income of $161 million or $1.21 per diluted share. The residual impact of the cyber incident on our first quarter 2024 results was consistent with the expectations we set out in the guidance we provided on our earnings call in February. The foreign currency exchange impact on our first quarter diluted EPS was favorable by approximately $0.01 versus the prior year.

Adjusted EBITDA for the first quarter of 2024 was $255 million, which is consistent with the first quarter 2023 adjusted EBITDA of $256 million. Turning to our first quarter sales results. Global dental sales were $1.9 billion, with sales growth of 0.8% and LCI sales decreased by 2.9%. The Global Dental merchandise LCI sales decreased by 3.7% versus the prior year. Merchandise sales were impacted by lower purchases by episodic customers and by lower PPE sales. Global Dental equipment LCI sales increased 0.2%. Our North American equipment LCI sales grew 2.9% and with some traditional equipment sales having shifted into the first quarter from last year. International equipment sales decreased 3.8% with positive trends in Germany, driven by technical service.

On a global basis, CAD/CAM equipment grew nicely with pricing on intraoral scanners having stabilized. Digital imaging sales decreased slightly. Dental specialty product sales were approximately $284 million with growth of 21.6% driven by acquisitions with low single-digit organic growth in implants and endodontics. Global Technology and value-added services sales during the first quarter were $217 million with total sales growth of 13.8%. LCI sales growth of 3.2% included 2.3% LCI sales growth in North America and 8.9% LCI sales growth internationally. In North America, sales growth was driven primarily by value-added services, while international growth was driven by our Dentally cloud-based solution. During the first quarter, we exceeded our goal of generating 40% of total non-GAAP operating income from our high-growth, high-margin businesses, with that metric coming in at 40.9% for the quarter.

Global Medical sales during the first quarter were $1.0 billion, with sales growth of 7.3% and LCI sales decreased 0.7%. We have strong sales of point-of-care diagnostics but lower PPE sales as well as lower pharmaceutical sales due to conversion to lower-priced generics. The cyber incident also impacted sales to episodic customers, which we are working to regain. Regarding stock repurchases, we repurchased approximately one million shares of common stock in the open market during the first quarter. Buying at an average price of $75.10 per share for a total of approximately $75 million. We had approximately $190 million authorized and available for future stock repurchases at the end of the quarter. Turning to our balance sheet and cash flow.

We continue to benefit from significant liquidity, providing our businesses with the flexibility and financial stability to execute on organic growth initiatives and strategic acquisitions, while continuing to return capital to our stockholders and reducing borrowings. Operating cash flow for the first quarter was $197 million compared with $27 million last year, driven by a reduction in our receivable balances, which were elevated at the end of the year. Restructuring expenses in the first quarter were $10 million or $0.06 per diluted share and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits and costs relating to exiting certain facilities. We reported other non-GAAP adjustments in the first quarter, which are detailed in Exhibit B to today's press release.

I'll conclude my remarks with our 2024 financial guidance. At this time, we are still unable to provide estimates for costs associated with integration and restructuring for 2024. Therefore, we are not providing GAAP guidance. We are affirming our guidance for non-GAAP diluted EPS and adjusted EBITDA growth. In addition, we are updating our guidance for total sales growth. For 2024, we expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $5 to $5.16 per share. reflecting growth of 11% to 15% compared to 2023 non-GAAP diluted EPS of $4.50. As a reminder, our 2024 guidance does not include any associated benefit from potential insurance claim proceeds related to last year's cyber incident. Our policy has a $60 million claim limit on an after-tax basis with a $5 million retention.

We have begun the process of filing a claim and believe it is covered under our cyber policy, although final resolution remains subject to insurer approval. We do not expect to begin recording any benefits from the claim recovery until later in the year. Our 2024 adjusted EBITDA growth is expected to increase by more than 15% versus 2023 adjusted EBITDA of $984 million. Our 2024 total sales guidance is now expected to be 8% to 10% growth over 2023 versus our previous guidance of 8% to 12% growth. This projected growth reflects continued recovery by our distribution business from the cyber incident and a strong pipeline of new specialty products and software innovation contributing to higher sales growth in the second half of the year. We expect modest overall equipment sales growth for the remainder of the year, with traditional equipment sales in line with last year and strong growth in Technical Services and CAD/CAM equipment.

This sales guidance also includes sales from the acquisitions we have completed to date. Our 2024 guidance is for current continuing operations as well as acquisitions that have closed does not include the impact of future share repurchases and potential future acquisitions. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions. With that, I'll now turn the call back to Stanley.

Graham Stanley: Thank you, Ron. As investors can hear, we continue to make good progress in restoring sales to pre-incident levels with specific focus on bringing back episodic customers and advancing several programs, of course, to reinforce to our customers the value and benefits Henry Schein provides to our customers. Again, we have made steady progress in this area. and are quite optimistic as we restore our sales on the distribution side to three incident levels and beyond. We are making good progress with the BOLD+1 strategic priorities, which are driving growth and further strengthening our business and value proposition. You can see from the investor package posted on the website, that in each area of the BOLD+1, we are executing quite well.

The new innovative products and software enhancements, clinical digital workflow for dental implants some good work in the endodontic and orthodontic areas should positively impact momentum as the year goes by. These new innovations, coupled with sales growth we are seeing from our recent acquisitions, should enable us to meet both short and long-term expectations and are hopeful that we could even exceed that. So with the overview of the business and our financial results, we are ready to take questions. Operator, we're ready if you are. Thank you.

Operator: Thank you, sir. We will now be conducting a question-and-answer session. [Operator Instructions] And the first question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

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