Q4 2023 Henry Schein Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to Henry Schein fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please press the star key followed by one on your Touchtone phone. If you would like to ask a question at the end of the call if anyone should require.

Jeffrey D. Johnson: Operator assistance during the call. Please please press the star key followed by zero on your Touchtone phone as a reminder, this call is being recorded and I would now like to introduce your host for todays call and grant Stanley Henry Schein, Vice President of Investor Relations and strategic Financial Project Officer.

Graham: Please go ahead Graham.

Speaker Change: Thank you operator, and my thanks to each of you for joining us to discuss Henry Schein. This financial results for the fourth quarter and the full year of 2023.

Speaker Change: With me on today's call are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein.

Speaker Change: And Ron South Senior Vice President and Chief Financial Officer.

Speaker Change: Before we begin I'd like to state that certain comments made during this call will include information that is forward looking risks and uncertainties involved in the company's business may affect the masses referred to in forward looking statements and the company's performance may materially differ from those expressed in or indicated by such statements.

Speaker Change: These forward looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein as filings with the Securities and Exchange Commission and included in the risk factor section of those filings.

Speaker Change: 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.

Speaker Change: Today's remarks will include both GAAP and non-GAAP financial results, we believe the non-GAAP financial measures provide investors with a 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.

Speaker Change: 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.

Speaker Change: Reconciliations between GAAP and non-GAAP measures are included in exhibit B of today's press release and can be found in our financials and filings section of our Investor Relations website under the supplemental information heading.

Speaker Change: For additional information.

Speaker Change: Please refer to our quarterly earnings presentation also posted on our investor.

In general by the way against that backdrop, our global implant Biomaterial sales group.

Quite a bit more than 30%, mainly due from acquisitions, but also some internal growth.

We posted significant growth.

In Europe in the European Latin American and Asian markets, mainly from the biotech acquisition in France, Anderson acquisition in Brazil, along with above market share growth.

In our leading by arises Camelot brand in Europe, primarily in Germany, while we had low single digit growth in our U S implant sales.

As a result of the cyber incident endodontics sales growth slowed somewhat last quarter.

Our orthodontic sales were also impacted by the cyber incident and by the exploration of the motion product patents.

Earlier this year to address this we launched the replacement product this quarter, which is being well received in the marketplace.

We remain highly optimistic.

Mystic about the growth in our.

Dental specialty products in 2024, as we have a robust pipeline of product innovations planned across various geographies in the first half of the year and we expect sales growth to continue to outpace the market growth.

Let's turn now to our technology and value added services business.

Excellent sales growth was driven by Henry Schein, one with most core products posting double digit gains, including our practice management software revenue cycle management analytics.

Sure.

Our solutions.

As we have seen all year Henry Schein one.

Growth was driven by <unk> ascend and entirely cloud based solutions.

Customer base of cloud solutions continued to grow well and increased by 30 is about 36% compared with the start of the year.

We launched a number of digital clinical workflow solutions for our customers, including AI technologies to provide our customers with highly effective diagnostic solutions during the fourth quarter.

We worked with one of the largest dsos to introduce the AI solution.

We are pleased to now have over 1000 users subscribing to these solutions.

Product enhancements introduced last quarter, including remote scheduling of payments also contributed to growth.

Great claims.

Eligibility and patient relationship management features we will be areas of significant.

Focus during 2024.

We continue to see strong interest in good growth in <unk> from our DSO customers and we have recently announced two new large multi site 10 tricks a set of accounts.

Turning to our medical business growth during the fourth quarter was also impacted by the cyber security incident.

In addition, the late flu season also had negatively impacted point of care diagnostic sales and patient visits which were down versus the prior year.

However, the late flu season is driving higher 401 sales.

Our new $300 million plus okay.

Platform grew sales in the high single digits during the quarter with this market segment continued to grow faster than the overall healthcare market.

Finally.

In late December we announced that we signed an agreement to acquire a majority interest in <unk>, which marks.

Sure.

Entry into the upper and lower extremity segment of the growing also feeding market.

This being a complement to our rustler.

Source and place business, which is also doing quite well this.

This transaction the <unk>.

Our investment towards a need, particularly for our ambulatory surgical center and orthopedic specialist customers, we expect to leverage our customer relationships and our contractual expertise to.

To grow the business we.

We expect to close this transaction later this quarter.

Concurrently we entered into a strategic relationship with extremity medical and medical device company focused on developing complementary products for bone infusion fixation and motion conventional treatments.

In summary.

We are executing well against our boat plus one strategic plan.

And we made significant progress.

Very pleased with us on our strategic priorities.

During 2023.

Speaker Change: We did complete the number of strategic acquisitions investing almost $1 billion.

Speaker Change: Part of about two to 2022 to 2024 strategic plan. These.

Speaker Change: These acquisitions are growing well in the high single digits to low double digit percentages and we're on track to achieve our goal of generating 40% of our operating income from sales of our high growth high margin products and services and we estimate that we would only have to be slightly below.

Speaker Change: That ratio.

Speaker Change: And that we would.

Speaker Change: We only would have been slightly below that threshold in the fourth quarter and for the full year of 2023.

Speaker Change: Cyber incidents have not occurred.

Speaker Change: As we look.

To 2024, our priorities include continuing to focus on customer experience. This is critical for us in all of our businesses and of course, the recovery of sales post cyber.

Post the cyber security incident.

Speaker Change: First we also will focus on <unk> and.

Speaker Change: And prioritize further enhancing technology and product development, including our integrated digital workflow.

Speaker Change: And continuing to grow sales and specialty products by integrating recent acquisitions.

Speaker Change: Through new product launches and we believe we have a good pipeline of product launches in both.

Speaker Change: Dental specialties products area, and our value added services, including Henry Schein, one with that I'll turn the call over to Ron to discuss our quarterly financial results and our 2024 guidance Rob.

Thank you Stanley and good morning, everyone.

Ron South: 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 or.

Speaker Change: Our fourth quarter non-GAAP financial results for 2023, and 2020 to exclude integration and restructuring costs amortization expense of acquired intangible assets.

Speaker Change: Asset impairment costs as well as expenses directly related to the cyber security incident.

Speaker Change: This is detailed in exhibit B of today's press release.

Speaker Change: The fourth quarter of 2022 included one additional selling week compared with the fourth quarter of 2023, we.

Speaker Change: We report on a 50 253 week fiscal year ending on the last Saturday in December and the <unk>.

Speaker Change: Extra week in 2022 was the holiday week between Christmas and New year's day.

Speaker Change: The next time our results include an extra selling week will be in 2028.

Speaker Change: With respect to sales growth our focus on LCI sales growth, which is internally generated sales in local currencies compared with the prior year and excludes acquisitions.

Speaker Change: To facilitate a more meaningful comparison, we have also excluded the estimated extra week of sales in the prior year from our LCI sales growth figures.

Speaker Change: Please note that our sales.

<unk> managing director of who presides over China and is located in Hong Kong can travel to our Shanghai office and should be that in the course of the next week or so so even in.

China things are back to a normality, but in all other countries in which we have a direct presence we've had a very strong first half.

We are looking at entering new markets. So we've appointed a distributor in the Philippines where are.

In talks in Indonesia, expanding our presence through distributed ships and partnerships in India, where we have registration of all of our products, but we haven't done very well with the first distributor that we appointed which.

Had a focus upon ultrasound, but it's not really gone anywhere at the moment, but were looking now at ear nose and throat and ophthalmology for the India market.

Canada is coming on stream as a new come as a new country market.

We have a good distributor in Gs throughout GCC throughout the middle East, they're looking to take our products into North Africa, Morocco, and Algeria, principally so there's still a lot of activity to build out the geographical footprint.

In the Nordics, we present through distributors in Norway, Sweden, Finland, and Denmark, but only Denmark, and Finland are really doing anything in terms of fulfilling the potential of those two markets. We have a lot to do a lot better in Sweden.

In Norway, we were in Russia and withdrew.

So there's.

There's a lot of activity.

Outside of North America, and I'm glad you asked the question because it is great.

We can look away from the west because we're very busy in the rest of the world.

This may be anomalously basic question.

What do the Americans do just say sterilized or semi tires would have the right technology would would be the invasive probes to date and what's your advantage.

Well, there's one products in America.

Americas. It is approved by the FDA and it was the last approval that was granted by them. Some 12 years or so ago. You. Those many of you will have heard me mentioned that product by name before.

Before the name of the product as trophy and the Manufacturers', an Australian company called Nano Sonics and they have.

Developed.

<unk> built a very successful business and in United States that we do compete with them all around the world, including Australia, which is their home market and we fare very very well against them.

The difference between our product and their product is there is a box. So it's power driven requires electricity.

<unk> has a fixed installation so it can't be moved our duo product goes into some Rockford coat.

It can be walked around a hospital by somebody.

As a clinician who's using ultrasound as a diagnostic technology.

So there are different features and benefits of the two different products try still duo and nano selects truthfully. They use hydrogen peroxide, which is a very effective disinfection and they forget so inside the bulks is actually a fault but of course it has to stay inside the box because if it were to leak out of the box it would not be.

Very good for the user as I said earlier the reason why clariant outside can be deployed by the hands in a manual process just because it's very safe all the other competing chemistries have to be kept in boxes. So we can actually sort of reduce the whole competitive landscape down too manual application of a high level disinfect and try style.

Banning alone people, who are keeping effective chemistry chemicals, but having to keep them behind closed doors.

One any defined cell landscape boxes power, yes, push a button and it all supposedly happens properly or.

Or use the hands.

And there are a lot of benefit from using their hands as quick.

It requires no capital.

Yeah, a whole host of advantages.

Yeah.

Yeah.

Okay.

If you were not to FTA approval, what would be your next steps would you try and potentially to go after approval for a different product your ophthalmology put towards it right that we have to understand that how one of the reasons why we are going to spend some time in the course of the next week with the lawyers based in Washington, just so that we can start.

The scenario planning, we believe that we would find out why.

Speaker Change: I couldn't see it.

Speaker Change:

Speaker Change: Yeah.

Speaker Change: They they couldnt given approval and.

Speaker Change: Manual application may be a difficulty for them.

Speaker Change: The generation of clorinda outside maybe a difficulty for them fundamentally so they're all but that those concerns would not be unique to the F. D. A every other regulatory body in the world has had exactly the same concerns every user perspective user has exactly the same concern how can I be sure that I can.

Speaker Change: Put the disinfectant onto the surface of the ultrasound probe in you and that user every time will cover the surface of the instrument.

Speaker Change: Perfectly completely so.

Speaker Change: So we have in development, some technologies dyes and various other methods by which we can cover the instrument and then remove the instrument through the disinfection process. So I I.

Speaker Change: Yeah.

Speaker Change: I don't we don't know what happened to us in that eventuality, but we have a quite possibly through further technology development and innovation, we could cover off the concerns that might be shared with us.

Speaker Change: And of course, then there is.

Speaker Change: Plan, B, which is to take our learnings with respect to ultrasound and look at ophthalmology the devices are far smaller.

The numbers it just still is a huge business opportunity we would look in another direction.

Ron South: I don't think it's game over and we have a presence in ultrasound because we have two approved for ultrasound with EPA.

Speaker Change: Just generally can you just tie to a specific I'll just round.

Ron South: It means that the work that we've done.

Speaker Change: Got it.

Speaker Change: On page 16 of the applications.

Speaker Change: Oh hi.

Speaker Change: Should you need to expand in the future once approvals and all that.

Speaker Change: It would likely be admitted or are you going to use and they are going to do a capital raise.

Speaker Change: Did you have you brought on facilities already know I think we've got a 9 million pounds of cash we have no debt.

And and expansion doesn't.

Speaker Change: Absorb much capital.

Speaker Change: Working capital is very manageable.

Speaker Change: Inventory.

Speaker Change: Because these are consumable products, we don't hold enormous amounts of inventory receivables very stable.

Speaker Change: The level of response gosh, let level it grows as turnover grows.

Speaker Change: Our clients are hospitals, the great majority I'll stay tuned and well funded in one way or the other we have an impeccable.

Speaker Change: Our history of of receivables collection.

Speaker Change: So I we.

We could Trevor.

Speaker Change: Trebled the size of the business and I think it would be self funded.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: That all the questions in the room.

Speaker Change: Yeah, Okay. So given the time, we're just taking a couple of questions and I have been submitted online.

Speaker Change: And do you anticipate the current industrial action in hospitals will materially impact your still sells into the NHS and kind of any impact be quantified.

Speaker Change: We can't quantify it we look very closely we've got we have great Intel through the <unk>.

Speaker Change: In animal systems that we've got in place is to usage almost day by day, there's no impact from this industrial action that is taking place across hospitals and unquestionably in some of the areas in which we're involved but it is not impacting the numbers that we can see.

Speaker Change: And you have previously said that you have got the U K market as mature with little opportunity for Grace can we therefore assume that the 24% increase is a one off to revert to pre COVID-19 position.

Speaker Change: Well.

Speaker Change: We've grown in the U K, if we were to compare other results with the corresponding period, which would've been six months up to December 31st 2019 at about 1999 2019, rather so that was the last six months it wasn't affected by Covid and we've grown since then so we are growing.

Speaker Change: Through Covid in terms of client.

Speaker Change: Position and more use of our products within hospitals.

Speaker Change: Well.

Speaker Change: I'd say almost an unanswerable question I don't think UK sales will grow next year by 24% I hope they do.

Speaker Change: But I don't think they will do.

Speaker Change: But it's certainly not ex growth.

Speaker Change: It slows down I don't think the U K will or ever has.

Speaker Change: Gone sideways and goes goes flat will go flat.

Speaker Change: Okay, and I have one more in the U K, what's the split between high level product sales and intermediate level products.

Speaker Change: Well, that's a distinction.

Speaker Change: And so for that for the room. So there are there are three levels of disinfection in the world of instrument.

Speaker Change: Disinfection, there's low level.

Speaker Change: And it means that you can kill bacteria and viruses. This intermediate level you can kill those cells same bacteria and viruses, but also micro bacteria, which would be the cause of tuberculosis is more difficult to kill organism and then the sporicide, though which is killing bacterial spores on top of micro bacteria and viruses in the back.

Speaker Change: Area and that's what defines a high level disinfectant in the UK, we only sell chlorine outside as a high level disinfectant and in fact, all around the world with one exception, which is purposeful product positioning in Australia, we only sell CRO and outside with the claim set of high level disinfectant, there's no need.

Speaker Change: For us to do anything other than describe it in all its full glory is a high level disinfectant in the best of the best.

Speaker Change: And that kind of brings us up to the I'll say and if there's no more questions in the win that will bring the formal meeting took place and any other questions are submitted online we'll make sure that he's ever spud to Tianjin course, alright lumpy. Thanks ever so much everybody. Thank.

Speaker Change: Thank you.