Conference Transcript - HSIC 2026-03-09

Mike Cherney, Analyst — Lyriank

Okay, awesome. Good morning, everyone. Welcome to the latest session for the Learink Global Health Care Conference. I'm Mike Cherney, the Health Care 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 Dinoffier from the IR team. I'm happy to say that Ron brought no slides, so we're just going to jump right into questions. And 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 fred's role fred leadership fred's leadership brought him to henry shine and what gets you excited about his skill set to bring to the next evolution of the company uh yeah thank you michael and

Ronald South, CFO

good morning everybody um yeah you know we were we were chatting beforehand i said you know it this is this is last week was an unusual week for us i think i think everybody who works at henry shine has had one ceo right everybody who is currently there and uh last week we had you know we had a new ceo henry shine has been in existence for 94 years uh and and fred lowry is now our fourth ceo in 94 years so it 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. But 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. It 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 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. And I think that we can find the best of both worlds there uh you know fred is a by trade is a mechanical engineer mechanical engineers uh 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 and 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 in the way that he asked questions uh a very curious mind and I think we're all looking forward to it.

Mike Cherney, Analyst — Lyriank

We'll give you until next week for the new strategic plan. So maybe a level set on the business. 4Q, if you think back recently enough, from you, from your peers, seem to show signs of, we'll call it stable to improving trends across the market. Where do you see the markets as you see them right now and where do you think for Shine as a whole you're at least maybe talking the equipment consumable side I'll touch on specialty after but you're outgrowing versus potentially undergoing

Ronald South, CFO

the market. Yeah I think that you know there is a what I'll call 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 dental space and you know we're watching things carefully. We still look at patient traffic as a bit of a barometer in terms of what's happening, opportunity on the merchandise side. And that's stable and perhaps getting a little more positive. 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 talking about kind of core merchandise, core equipment, was in that 2% to 4% range. I think we're probably still a little lighter, 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 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. And then 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. And so it's really, 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 cyber attack 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. So that has 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 costs of the promotions with them. and in the end really saw great success from that. And so those are the things that 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 be more of the catalyst to drive more growth internally.

Mike Cherney, Analyst — Lyriank

And 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 on equipment. So 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 that your customers felt like they needed?

Ronald South, CFO

Yeah, well, it's just really more from a feel for where we're seeing the most popularity of some of these products with our customers, getting feedback from customers. So I think that was really the driver of how we partnered up. But to your point, even though we had the promotions, we really felt like that growth we saw in the fourth quarter in equipment is a bit of a bellwether for us in terms of the confidence that 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. So 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 is an opportunity for growth for us going forward.

Mike Cherney, Analyst — Lyriank

Might be bad for the duct tape market, chair replacement. And as 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 DSOs 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? And 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?

Ronald South, CFO

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 some positivity to equipment sales coming from that. But it tends to not move as much as one might expect based on that change in rates. What we see as being – we've always said a typical barometer of what is 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. And so one of the macro factors we look at closely is unemployment rates. If unemployment rates are staying relatively modest, which they have, that means there's more people with dental insurance. There's more people with access to care, and that will at least maintain a consistent level of foot traffic into the practices. So I think that's the macro we look at most closely. In terms of what are our sales reps and the discussions they have with their customers, I don't know how much they get into that type of indicator. I think their discussions with the practices really focuses on how can you see more patients in a day? How can you, you know, develop greater administrative efficiency and operating efficiency in your practice? And 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? And how can we provide you with the tools to drive that efficiency? And I think that's probably the primary discussion that you see, you know, with our customers.

Mike Cherney, Analyst — Lyriank

And as you think about your growth relative to the 2% to 4% targets in a market that maybe doesn't support as much and talking about going the offensive, how much has your breadth with DSOs played into your scale advantage in order to try and outgrow the market? And how important is the role of the DSOs on the merchandise and equipment side in terms of that equation?

Ronald South, CFO

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 a direct result of a little greater de novo expansion from some of the DSOs. And so we did see, you know, some sales into some new practices related to that. But the DSOs do, 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. So if they're growing a little bit faster, we're going to be continuing to take market share as well.

Mike Cherney, Analyst — Lyriank

Got it. And I know historically there's been the push and pull with the DSOs in particular on your ability to add value by third-party manufactured products. It's 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. But 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 of the DSOs and your ability to add value?

Ronald South, CFO

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 want to be in, right? It has to be more, how can we help you drive greater 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 that anybody else has out there. So when your chair goes down and you're our Henry Schein customer, you're going to be prioritizing and your chair is going to be fixed fairly quickly and the lost revenue is going to be minimized. But then 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 implants or endodontic procedures. So those are all areas that we can address as one 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 goods to a practice.

Mike Cherney, Analyst — Lyriank

So maybe if we can shift to the specialty segment business for a bit. It's grown fast. It's kind of, I don't want to say come out of nowhere because that's not the case. But 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?

Ronald South, CFO

Certainly. So I'll start with implants because that's the largest of our specialty products. You know, we have – our estimates are 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 big presence in China with implants. But we've got a strong presence in Europe where we are seeing 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, and by value implants, I think something that can be sometimes misunderstood there is that a value implant is going to look the same as a premium implant for the most part, but it is often the services and the surgical services you get associated with that, whether it be surgical planning or otherwise. And value implants have become very appealing to more and more general practitioners who are interested in doing that straightforward single implant. And so that helps us, we talked about, in working with our DSO customers. Our DSO customers like having access to that value implant. When we bought SIN 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. So it is a, when you look at implants, you really have to break it between, you know, kind of 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. That's something you typically defer, an implant you can defer. So it is a very steady business. So it really comes down to creating products 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. And then the last one you mentioned was orthodontics, which has been 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. But I think that 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 good plan for us as opposed to trying to expand it into a much larger business. We do have some DSO customers who like our offerings on orthodontics, and we primarily serve them.

Mike Cherney, Analyst — Lyriank

And so maybe just to dive in specifically on implants, because it's a big market share. You talked about the product launch in the U.S. As you think forward, what is the scale that you're trying to achieve on the implant business within the broader Henry Schein? How strategic should this asset be over, the 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 a couple of the leading vendors or is this just an alternative? Again, just try to think about where this business should sit going forward.

Ronald South, CFO

Yeah, I mean, I think that, you know, it's probably best to look at it, you know, more holistically than that. And, you know, we've talked about our high growth, high margin businesses, which are really, 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. And we have a goal of exceeding 50% by the end of 27 with that. So I think that it's, you know, where do implants fit into that? They're going to 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 going to really try to go change the value implant market. But 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. And if we can compete in that area, then I think it's an area that will just help kind of drive that continued growth of those high growth, high margin products. products, which the significance of those products is that we own all of those products. 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 on all the implants. So I think they'll help drive some of that for us. But I wouldn't say that it's necessarily, well, we're going to go after one very specific piece of it. It's just, what can we do to help expand the market itself?

Mike Cherney, Analyst — Lyriank

Shifting a bit to the technology side, Henry Scheinwan, I don't think it's going to be a fireside chat at this conference without asking something about AI. You've had some interesting work you've done on the digital imaging side and in 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?

Ronald South, CFO

Certainly. So, yeah, 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 the Henry Schein One platform, specifically Dentrix Ascend and outside the U.S. Dentali. And 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. So 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, and 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 and 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 their hands. Equally with Image Verify 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. And 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. Now you've got to bring the patient back. You've got to get the x-ray. So if they get that immediate warning, this particular image will likely be rejected, they can do the x-ray again right there while the patient's in the chair. 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?

Mike Cherney, Analyst — Lyriank

And 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? I mean, you have such a strong market penetration of Dentrix as a whole. It's the operating system for the vast majority of dentists in the U.S. especially. So how does that interplay move relative to the R&D that you're putting in through the platform?

Ronald South, CFO

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 US there's about 2,000 different dental plans and 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 and you're gonna get patients to say well I until I know how much I got to pay how much my insurance is not gonna cover and I gotta pack into the treatment eligibility Pro they have an answer they will have an immediate answer for that, you know, for that patient under, under those circumstances. You keep the patient in the chair, you get the treatment done, you get the revenue stream from it. That was always, that was, 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, very, you know, time consuming. So that's just one example. But there are other things where we see, you know, like you said, you know, in terms of what can we kind of push to them to say, have you thought about this here is something that will help your 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

Mike Cherney, Analyst — Lyriank

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 course of 2026 investments versus realization like how are you marking yourself on the checkpoints and 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 i know it's a great question

Ronald South, CFO

and obviously it's a high priority for us right now right you know this is uh you know really going to be a driver of of operating income improvement for us going forward uh the you 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. And, 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. So, it's going to be the 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. That was contemplated in our guidance this year, 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, adding some costs on in the first half of the year. But we're confident we're going to see net benefits on that in the back half of the year. And you'll see greater. We mentioned on the call a couple of weeks ago that we expect, you know, the earnings growth to be a little more heavily weighted to the back half of the year than the first half of the year. But these are all the whole I mean, the whole organization is part of this. There's there's two work streams. There's one around GNA. There's one around gross profit optimization. But they're all going to kind of come together and we feel like can drive the growth to the goals that we have.

Mike Cherney, Analyst — Lyriank

And this seems like a very offensive move that you're making versus for a company that historically has looked for optimization efforts at times, multiple restructuring programs. So 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?

Ronald South, CFO

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, technological tools that we're not perhaps optimizing right now, and how do we deploy those tools? So it's much more structural and, in my opinion, will be much more permanent and more difficult for the cost to kind of creep back in, like perhaps we've experienced a little bit of in the last several years.

Mike Cherney, Analyst — Lyriank

I don't want to run out of time for discussing the medical business. I've heard the last couple quarters a lot more discussion on the at-home dynamic and patient directs, use your term. How do you think about the strategic positioning of medical now? And as you think about the at-home opportunity, what's the most exciting and appealing part of why you're expanding there?

Ronald South, CFO

I think, you know, our medical strategy has consistently been follow the patient. So I think it was probably about 20 years ago that we kind of got out of the hospital business, right? We saw more and more patient procedures leaving hospitals, being done more in the ambulatory surgical centers, being done in physician offices. So and quite frankly, our logistic abilities were much better geared towards that smaller order that could be delivered to a smaller office. So we fully focused on our strength and followed where the patient procedures were going. Those procedures have since also begun to include more and more care that people are getting at home. And so we began partnering with more home health providers. Like we're not in the home health care business, but we are providing, we're supplying those home health providers, right? And we made a couple of, I think, timely acquisitions and have created a holdco for our, we call it our home solutions business, and 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. So we really see that as an opportunity for us going forward. Beyond that, 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.

Mike Cherney, Analyst — Lyriank

And 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 is it these are going to be primarily still heavily consumables, merchandised-oriented businesses?

Ronald South, CFO

I think there's, you know, it's going to be more the latter. I think we're going to continue to focus more on the consumable merchandise piece. And once you get into DME, it can be a little more complicated. That's not to say we don't always monitor what the opportunities are there. But I think the closest to DME we've gotten to is kind of the continuous glucose monitors, right? But 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 similar products available in the home solution side as well.

Mike Cherney, Analyst — Lyriank

Well, I think we're just about out of time, if I can see that number flaring. Ron, as you embark on the new leadership team, obviously, thanks so much for keeping us up to speed and look forward to seeing what comes next.

Ronald South, CFO

Very good. Thank you, Michael.