Henry Schein Inc (HSIC) September 2026 Conference Transcript

All right, good afternoon. Why don't we get started? My name is Jeff Johnson. I'm one of the senior medical technology analysts at Baird and our next presentation this afternoon is from Henry Schein, the largest distributor of health care products and services to office-based practitioners in North America and Europe. With us today from Schein, we're happy to have CEO Fred Lowery and Chief Financial Officer Ron South. Fred, I'm going to give you a kind of opening remarks here if there's anything you want to say or we can move right into Q&A.

Well, let me just start by saying thank you. Thanks for having us. We're excited to be here. I am six months into the role now, and I guess the good news is that I'm more excited about it six months in than I was coming in the door. And I'm more excited because I see more opportunity than I did coming in the door. And so I feel really great about that. I'm excited to talk to you about, you know, what's driving that. I'm very excited about where we are with value creation. I feel very committed and confident that we're going to deliver on our commitment there. And I'm excited about areas that we can grow the business faster. I want to talk a little bit about that today. And then the three priorities that I have, you know, accelerating growth, simplifying the business, and driving more operating rigor in the business. So I'm looking forward to the conversation.

All right, great. Well, let's jump right in. So, you know, I was thinking about it. I think this is my 23rd year at Baird. And so that would mean about 22 conferences with your predecessor, with Stanley. Obviously, a big change at the company. Stanley's been there for many, many years, has been well-loved throughout the entire industry. How have employees responded to the change and just kind of what's going on inside the company at this point for the first change for the first time in 30 some odd years?

Well, let me just say, nobody is Stanley. That's an impossible thing to be. But no, you know, I would tell you that the feedback from our Team Shine members, which is what we call our employees, has been very positive. You know, people have really leaned in. I hear people say things like, hey, this has been really a refreshing change. I hear people say, hey, we know that we need to change in order to be better. And we're excited about the opportunities ahead of us. And as you know, you know, we have an amazing culture inside Henry Shine where our team Shine members are very focused on supporting our customers. They're mission driven and they're focused on supporting each other. And they're excited for us to continue to improve in the future. So I feel good about so far how people are really leaned into to the focus areas.

All right. Great. And I saw one of your channel partners in the room. I don't know if he stuck around or not, but, you know, there's also been a change, obviously, or you've had to go out and meet all of your customers and your channel partners and manufacturing partners. Again, a change for the first time in a long time. How have those relationships begun to grow? We've always heard dental is kind of a special area and, you know, it takes time to build relationships there. Where are we in that relationship building?

Yeah, I mean, I'm certainly They've been out with lots of customers and lots of our suppliers and other partners and working on building those relationships. But the good news is that's one of the things that really makes Henry Schein special is the deep trust that we've earned over the years with our customers. They really do trust us and they absolutely want us to help them make their businesses better. And I'd say the same for our suppliers. I think our suppliers, we have deep trust with our suppliers. And, you know, as I think about it, people are excited about the access that we provide to customers. And as we continue to grow and take share in the market, our suppliers want to be a big part of that. So so far, so good. I feel good about those relationships and I'll continue to personally work on those relationships. But it's really our 26,000 team members who have developed those relationships over the years that matters.

All right, great. And then, you know, I think when you came on board, Shine was in the early stages and you've kind of moved those efforts nicely along on an operating income improvement plan, $200 million of operating income improvement expected over the next two to three years. uh you know one your thought process on how you let some of that drop through to the bottom line versus how much you reinvest in the business uh obviously in the past there's a lot of discussion that you know through some of these plans it didn't really drop through the bottom line but your commitment to uh you know to doing to letting it drop through number one and number two how does that help you though on the core side of the business reinvest and really drive this continual process improvement?

Yeah, so I think it's really important. I love the way you phrased it. It's operating income improvement of a couple hundred million dollars over a few years. And we see that as net, net improvement. So dropping through the bottom line. But what's important as you look at it, it's not a one and done thing for us. These are areas where we're building new capabilities into the company that we're going to benefit from beyond just the 200 million. And I'll give you a couple examples. On the gross profit side, one of the areas we're focused on is improving our pricing process. So we've added capabilities from a pricing standpoint, both in people, in process, in tools and systems. And so we're going to benefit from that, and we are benefiting from that now, but we're going to benefit from that in the future, both so that we can raise price in a more targeted and proactive way, but also lower price where it makes sense, where we want to gain share. And so that's an example of a capability that we've built. And on the cost side, as we have mentioned earlier, we're outsourcing. One of the activities, we're outsourcing some of our back office functions, and we're in the middle of doing that now. We started with two functions, finance and customer service, and I'm working our way through that, and over time we'll add other functions to it. But we've started with a lift and shift where we are gaining the labor arbitrage. But over time, we're going to standardize those processes, those multiple processes. And then after we standardize, we'll build technology on top of that to streamline and lower the cost. So we're going to continue to see the benefit from that beyond this $200 million. So think of us as really building the company to be able to scale without adding a whole lot of extra costs. So that's really the opportunity set there.

And I think on your last quarterly call, and it might even have been the last two quarterly calls, You've kind of alluded to, it's not necessarily in guidance, and obviously you haven't guided to 27, but to double-digit EPS growth. Is that a commitment that you feel comfortable making to your investors and to the street over the next year or two, or am I over-reading some of your comments?

No, I think you're reading it exactly right. I think what we said is that we're going to deliver this $200 million, we're going to accelerate the growth in our business, and we're going to grow double-digit. That's EPS. That's exactly right. feel comfortable with that. Good.

All right. Maybe if we can shift over to the end markets. I think there's been maybe some mixed signals over the last few quarters. Maybe walk us through your view of the world on dental trends in the U.S. versus Europe versus the rest of the world.

Yeah. I mean, we think the dental market in the U.S. is steady. I mean, there's no new news from our last discussion at our earnings call on the market. We're outpacing the market growth, of course so we're taking share there we think the the dental market in Europe is is growing nicely for us as well and we don't we don't see any significant changes to that market either early in the year we saw the European market kind of outpace the US market and I think about specialty in particular and maybe even more specifically the the implant business we see you know faster growing market in Europe versus the U.S., but we actually are participating well in the U.S. market, and we're excited about the value end of that market. We see more growth in the value end of the U.S. market coming. So that's how we think about the global market.

And you're building a value. Sorry, I didn't mean to interrupt you. No, I was just going to say, you're building a little bit more or putting a little more effort behind the value business here in the U.S. following the SIN or the SIN?

We are. So we became the majority owner of the SIN value implant business back in Q1. And so that is going well. Small base, but it allowed us to really orchestrate our strategy between our premium brand in the U.S. and our value brand. And so that's on track and doing well.

Okay. And on the other specialty side of the business, on the orthodontics business you know I haven't heard you talk a whole lot about that I think I saw LinkedIn you were over at the Smilers plant maybe recently or something like that I might be wrong on that but I guess my question is you know what is your commitment to the clear aligner space it's it's it's a more and more competitive space it hasn't necessarily grown a ton and outside of the top two or three there it's it's pretty hard to make a profit or turn a profit in the clear aligner business at least some scale it is so how are you thinking about the clear aligner business uh going forward yeah i just specifically on clear aligners and just i'm just saying orthodontics in general so it's a small part of our business so it's not something that we're gonna we spend a lot of time talking about however you know the business is performing pretty well uh but it's a very small base and it's really not i would say it's not material to the overall business and specifically on on the aligners piece you know we have a really strong regional position in our business in france and you know we're happy with the growth of that business all right all right ron i'm gonna uh ask you a couple questions just on the consumable side of the business i think you've grown a little over four percent in the first half of the year on the north american dental consumable side you put up a six and a half percent number in the second quarter uh i think you know it was at least a couple points above what i thought was even aspirationally possible uh you know what's going right in that consumables business in a market that every way I dissect it, I feel like consumable volumes are probably flattish. How do you get to 6.5% growth and what's the sustainability of at least a good solid above market growth rate?

Yeah. You know, something we talked about in the Q2 earnings release was that 6.5% growth rate It was really probably about half of it was the contribution from volume. About half was contribution from price. But on the volume side, that means we're taking market share. There's a number of things, I think, that are contributing to that. We see better growth in our private label merchandise. I think we said that we had about 2x a growth rate in a private label versus our third-party brands. also as DSOs continue to slightly outpace the growth of the overall market and our position with our DSO customers we get the benefit of some market share gains there as well and on the pricing side I think it's you know there's a number of things you're seeing a little bit of dynamics perhaps with PPE with some stabilization on the pricing there but also I think some early benefits from the value creation initiative we have around gross profit that you know where we're getting a little more a little smarter on the pricing, a little more scientific approach on the pricing is giving us some help, some early dividends from that initiative.

I just would add, if I could jump in. I think there's two other things where we're seeing some momentum. One, if you go back to the second half of last year where we did some promotions and we really engaged some of our, what I would call more episodic customers who were not buying from us regularly, we actually have retained a lot of that business. And that's helping us from a share gang standpoint. And I think the last one is just we've been successful, just kind of a net positive and having more reps join us from other companies. And we're seeing that help us from a growth standpoint also.

Yeah, no, and it, you know, there are some, competitors of yours out there that continue to struggle continue to lose uh some reps uh maybe a business that uh is in play right now uh how much is that helping you i mean as i think about you know let's say you settle in at four-ish percent consumables growth uh you know can can price stay a point or two and then these other exogenous factors help you buy a point or two and then the market is one or two. Is that a way to think about a sustainability of three to four or something like that? I don't even know if my numbers add up as I say that, but it seems like all three of those factors are helpful.

Yeah. I don't want to give me any future guidance.

Yeah. No, no, no. Just talk to me conceptually about- But I do think you've got the right levers.

I mean, the only other lever I would add is that our exclusive products are actually doing really well also. We've mentioned CuraNOT before and we have that product exclusively and we think that is also a lever for growth in the future.

Yeah, for sure. I mean, some of the CuraDot numbers I've heard, it absolutely seems to be adding to your growth. I hope it can continue to build. And that is an exclusive. Is there any chance that could go away from being an exclusive?

I don't want to disclose any contractual things, but we feel really good about our relationship, and we think that's going to be an exclusive relationship for some period of time.

And I made a comment about, you know, one smaller distributor that might be in play. I'm sure you won't confirm or deny, we've heard maybe that Shine has passed on that business. I guess the way I would phrase the question is, in the past, it seemed like Stanley would buy a lot of things, including smaller distributors, just to capture more customers, for whatever reason. And it sounds like you guys have maybe passed on that deal. You know, what's your strategy or how do you view your M&A strategy maybe different than past management?

Yeah, so let me just be clear. I'm not going to comment on any specific M&A. But as I think about M&A, definitely will be a part of our growth algorithm in the future. But relative to the past, I think you'll see us be more disciplined in our M&A approach. And what I mean by that is that we're going to focus on things that are highly strategic. And by highly strategic, I mean, you know, assets that will help us continue to be the value creation platform for our customers. So things that are additive in that regard. And then secondly, things that are going to help us from an organic growth standpoint. And then finally, we absolutely are going to focus on things that drive really good returns for our shareholders as we're measured by ROIC. So I think that's the way to think about our strategy in the future.

All right, fair enough. Ron, just going back to your comments on the consumables, the 2Q number there at 6.5%, almost half of that price. So call it just north of 3. How much of that was passed through of your manufacturing partners raising price versus some of this, whether it's dynamic pricing you're doing, some of the other smarter pricing you've referred to, just your own internal efforts on pricing that doesn't have necessarily to do with your acquisition price from your partners?

You know, there's a lot of overlap there within all those concepts that you mentioned. So it's really hard to kind of pinpoint specific, you know, numbers to that. I mean, all those things, you know, contribute to the pricing increase, whether it be an increase in cost that we're seeing from suppliers or just situations where we see the opportunity to get a little better price based on what we see in the market. So I think there's a number of factors that's really kind of hard to pinpoint to assign a number to those concepts because of the overlap there.

Are some of those internal efforts on pricing, again, that are part of the $200 million operating income improvement plan, those are not just sustainable, but can they be additive to your growth rate over the next several years? I mean, one thing we've started to wrestle with is, you know, I think some of the manufacturers pushed price last year post-Liberation Day from a tariff perspective. This year pushed a little more price based on, you know, oil prices and potential for input costs to go up later this year. But it's going to be hard to sustain probably the level of pricing, I think anyway, in dentistry that we've seen over the last two years, much beyond this year?

Well, you know, our goal is really optimizing gross profit growth there, right? And so that's going to come through a number of different ways. It might be increasing prices where we have the opportunity to do so. It might be decreasing prices where we see that we are potentially an outlier and we can increase market share in a particular product category by bringing down prices. But, you know, the goal is to actually increase gross profit dollar growth. And if we can achieve that, then that's really what the systemic approach we're taking as part of this value creation initiative would be to achieve that going forward as well.

Okay. The other thing to consider, especially in inflationary environments, in cases where either we don't have the ability to push price or where we are pushing price and customers would prefer not to receive that price, we do have alternatives. and oftentimes those alternatives are our own brands or our private label products and again you know that creates the situation where we get to see gross profit dollars go up because typically we have better better margins on those on those products so that's another opportunity that we have to to to to make our gross profit dollars grow yep all right helpful uh maybe walk us

through kind of your view of uh the dental equipment market at this point uh you know we throw in a couple geographic comments, but also just generally speaking, is there demand for spending on $20,000 iOS systems all the way up to $120,000 digital CBCTs?

Yeah. So when I think about equipment, I'd maybe segment it out to more traditional equipment and maybe digital. On the more traditional side, we expect to see growth in equipment this year. So So our backlog looks fine, and we expect to see growth this year in Q3 and Q4. As it relates to more digital equipment, we're seeing good volume growth. But what you're also seeing is new entrants in the market at a much lower price point. So the volume growth is great. But because of the new entrance, you're seeing a lower ASP for those products. And so we see the volume growing well, and we think we're participating at the right level in that space.

But you feel comfortable that your overall North American and global dental equipment business can grow in the back half of this year?

Yes.

And any reason to think that that pattern changes as we move into 27 and beyond? Is this still a growth market over time? Well, I'm not going to give any 27 guidance today.

But the second half, we certainly see that we'll grow in the next two quarters.

I'll give you the chance. All right. You know, that business went through a couple-quarter period where it felt like whether it was point-of-care diagnostics, some other pressures, it just wasn't growing much. You know, there was some chatter out there that, oh, one of your competitors, even though they've been around forever, but after they went public, Like, all of a sudden, they were much better for whatever reason. They were putting more pressure on you and the whole industry. But just the business did get back to growth this past quarter. I mean, how to think about the medical business growth, you know, over the next couple few years and over the back half of this year?

Oh, listen, let me talk a little bit about medical. And, Ron, you can talk about the specific growth rates if you like. We're really excited about our medical business. There are places in that business where we see really great growth at a good margin. And let me give you a couple examples. Our home solutions business is becoming a sizable business, a $400 million business. And it's growing high single digits. And we're very excited about that business. There's more to do there. And it grows at a higher margin. And it comes through at a higher margin than the overall medical business. So that's quite exciting. We have another business that we call a government or specialty. And that business actually has good growth as well and margins that are above the overall medical business margin. And the part of the business that you were describing before, kind of the med surge piece of the business, listen, we've been competing with the same competitors for a very long What makes us a very special company is that we have a supply chain that is tuned to supply small quantities to many, many different locations incredibly reliably overnight. And we do that really well. We do that by working with non-acute operational people in those customer locations, and they very much appreciate our flexibility, and we think we're competing well there. Now, we're seeing some challenges in our more respiratory business, and we called that out earlier in the year. That's about 15% of that business. And so the softness that we've seen in that testing environment is what you're seeing in that business. But otherwise, I feel like we're competing incredibly well with some very competent and capable competitors.

Are there additional things to plug into the home solutions business through acquisition or just new products you could begin to layer into that business?

Yeah, I mean, you know, we continue to scale the business. And so there are, you know, opportunities for both inorganic growth and more organic growth in that business through product lines.

All right. Maybe in the last few minutes here, I want to talk about your tech and value-add business. I think you have close to 100,000 practice management software users across the globe, 15% plus or minus cloud-based. You know, where does that move over the next two to three years? Can you get that up to 50%? And I think you monetize the cloud-based customers at a higher monthly fee relative to some of your on-prem customers. But just kind of walk me through kind of the importance of getting these guys cloud-based and locked in longer term.

Yeah, in the spirit of saving the best for last, you really have. So this is probably one of my most exciting things to talk about is our technology business. But yeah, you know, the way I think about it is, just to reiterate your point, For on-prem, the monthly income is around $500. For cloud-based, it's around $800. And our cloud-based software comes in three different packages. You have kind of a low-end package, the Ascend Essential, you have the mid-range Ascend Pro, and the high-end Ascend Accelerate. And what we're seeing is that customers, as we launch new capabilities, customers are actually upgrading to other packages. So that $800 a month is actually growing because as we add capabilities, people are recognizing the value in those capabilities. So we're able to increase our share of wallet just by introducing new capabilities. And by the way, leveraging AI in our development process, we're introducing new capabilities much faster than we have in the past. So that's a pretty exciting part of that business. The second way we're growing is by increasing share of wallet. Now, most new installs are the cloud-based version. So that's where the biggest growth is coming and share of market gains there. And then we also have the transitions where people are going from on-prem to cloud-based. And that's been a little bit slower. But we're very excited about the growth rate in that business. We expect that business to grow. It's growing high single digits. we expect it to grow in the 8% to 12% range over time.

And again, if it's about 15% cloud today, would 50% be an aspirational number over the next three to five years?

Yeah. I mean, we haven't really given that number out, and I don't want to make a commitment, but if you can think about most of the growth in that business coming from share of wallet and share of market, and so think about that growth kind of split 50-50, and 8% to 12%, and, you know, I'll let you try to figure out that math.

And that conversion rate, you know, you have a lot of customers who are quite happy with their on-prem dentric system, so the conversion rate may not be as fast as what people expect.

Okay. No, that's helpful. All right, maybe we'll just wrap up here on balance sheet and capital allocation. I think you guys are just under three times levered at this point, Ron. So buybacks and debt paydown, are those the biggest focus right now, or how do we think about the use of capital going forward?

Yeah, you know, we did $325 million in the first half of the year in share repurchases, which is a little higher than what we would typically do. We were also a little lighter in M&A, so we had that available capital. We were also generating good cash over the first half of the year, so we were able to do so without really putting, you know, much more pressure on that leverage. I think we went into the year at about 2.8, and we're still at about that 2.8. so we clearly saw that as optimal use of capital as a priority we quite frankly believe that the share price is undervalued and we see as an opportunity for us to you know to buy back shares we're going to it's a you know as you're aware it's a very tax efficient way of providing some return to our shareholders at the same time you know we're conscious of that leverage we want to be sure that we're managing the balance sheet responsibly and uh and in managing our cash responsibly so you always want to leave something in case there's a you know a good M&A opportunity out there but in the meantime it's really clearly has been the priority in an area where we've you know been willing to invest all right and you know generally 500 million a year in free cash flow is that a roundabout place to be for the next few years yeah I mean I think you know if you look at the history we've done operating cash flow in the neighborhood of say seven to 750 with capex being probably closer to 150 so you could probably push that up to something closer to 600 in terms of what we can accomplish in free cash flow. Okay.

And as you look at some of the OPEX savings and maybe some integration of past acquisitions or other efficiencies, I mean, does CapEx go up or down over the next couple of years?

Well, you know, CapEx has gone up some over the last several years because our investments in, say, that 22, 23, 24 period were in more capital intensive companies. You know, We did the buy with biotech, implant manufacturer in France, with SIN in Brazil, also an implant manufacturer. So you begin to see inherently you're going to see more CapEx. I think it's probably leveled off at this point for a while, excluding whatever investments we want to make in the business along the way.

Okay. All right. That's helpful. Well, Fred, we're down to 50 seconds. I will leave it to you if there's any final comments or parting thoughts you want to leave us with.

No, thank you for the time and the questions. I mean, we're incredibly excited about the opportunity to accelerate growth, and we'll do that by being the value creation platform for our customers. And I think all of our Team Shine members are focused on doing that, and we're aligned around those goals of accelerating growth and simplifying our business and driving more operational rigor. So I look forward to talking more about the business at the end of the quarter.

All right, great. Please join me in thanking Fred and Ron for a great overview here of Henry Schein. And our next presentation is set to begin at 12.50 p.m. Eastern time. Include Alignment Healthcare in the Grand Ballroom 3, Novanta in Empire Ballroom, Selectus in Empire Ballroom 2, and that's it.