Henry Schein, Inc. (HSIC) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Operating Cash Flow and Gross Margin Increase: The company reported solid financial results with strong operating cash flow and an increase in gross margin, driven by high growth, high margin products and services, and successful acquisitions.

• Improving Sales Trends in Distribution Businesses: Sales trends in dental and medical distribution businesses are improving, with a focus on regaining episodic customers post-cyber incident.

• Growth in North American Dental Equipment Sales: There was positive growth in North American dental equipment sales across traditional equipment, digital imaging, and CAD/CAM products.

• Expansion in Membership for THRIVE Signature Program: The THRIVE Signature program saw nearly 1,500 new members in Q2, bringing total membership to approximately 6,000 U.S. dental practices.

• Strong Growth in Dental Specialty and Technology Services: Dental specialty product sales and technology and value-added services sales saw significant growth, with notable advancements in dental implants and cloud-based solutions.

Pessimistic Highlights

• Slower Recovery from Cyber Incident: The pace of recovery post-cyber incident has been slower than anticipated, impacting sales and financial guidance.

• Challenging Economic Environment: Certain markets are facing economic challenges, affecting the company's short-term results and leading to an update in the full-year financial guidance.

• Decline in Merchandise Sales: There was a reported year-over-year decline in merchandise sales, reflecting the slower recovery pace and lower sales of PPE products due to reduced glove pricing.

Company Outlook

• Updated 2024 Financial Guidance: Due to the slower recovery from the cyber incident and challenging economic conditions, the company has updated its 2024 full-year financial guidance, expecting lower sales growth and adjusted EPS.

• Restructuring Plan for Efficiency: A new restructuring plan aims to integrate recent acquisitions, right-size operations, and increase efficiencies, targeting $75 million to $100 million annual savings.

• Long-term Financial Goals: Despite short-term challenges, the company remains committed to its long-term financial goals and strategic plan, supported by a strong balance sheet and cash flow.

Q & A Highlights

• Q: Can you discuss the 2024 sales growth expectation reduction and its causes? (Jon Block, Stifel)

  A: The reduction reflects more conservative expectations for distributor recapture and a slower economy. The original guidance anticipated stronger economic conditions and a faster recovery from the cyber incident. (Ronald South)

• Q: What is your conviction on getting customers back post-cybersecurity incident? (Jon Block, Stifel)

  A: The company is confident in regaining market share, focusing on larger accounts and improving outbound efforts through its sales force and telesales team. (Stanley Bergman)

• Q: How should we think about organic growth and the margin profile for 2025? (Jason Bednar, Piper Sandler)

  A: The company expects to maintain momentum in market share recovery, with benefits from restructuring and specialty product launches contributing to growth. The restructuring plan will continue into 2025, targeting operational efficiencies. (Ronald South, Stanley Bergman)

• Q: Can you discuss the status of your agreement with Dentsply Sirona? (Jason Bednar, Piper Sandler)

  A: The relationship with Dentsply Sirona is strong, with no formal contract but a good understanding and strategic partnership. The company is confident in maintaining a positive relationship and addressing market needs. (Stanley Bergman)

• Q: What are the effects of larger customers potentially ordering away, and what is the expectation for their return? (John Stansel, JPMorgan)

  A: Larger customers are generally returning, with efforts focused on regaining and gaining new customers across both dental and medical distribution businesses. The company is optimistic about market share recovery. (Stanley Bergman, Ronald South)

• Q: How is the shift towards owned brands reflected in your guidance? (John Stansel, JPMorgan)

  A: The shift towards corporate brands is considered in the guidance, with expectations of continued demand for lower-cost options, which is positive for gross profit margins. (Ronald South)

• Q: Can you provide specifics on implant growth in 2Q and expectations for the back half of the year? (Elizabeth Anderson, Evercore ISI)

  A: Implant sales in Europe and Latin America are strong, with expectations of growth in North America following the launch of new products. The company is optimistic about the dental specialty segment's performance. (Stanley Bergman)

• Q: What are the trends in July and expectations for Q3? (Elizabeth Anderson, Evercore ISI)

  A: The company is experiencing continued growth in its distribution businesses into July and expects this trend to continue into Q3, with improvements in specialty and technology businesses as well. (Ronald South)

• Q: What is the expectation for medical customer return and the impact of larger customers ordering away? (Dane Reinhardt, Baird)

  A: The company expects to continue regaining market share, with larger customers generally returning. The focus is on gaining new customers and recovering market share across both dental and medical distribution businesses. (Stanley Bergman, Ronald South)

• Q: How does the shift to lower-priced branded options impact your guidance and expectations for next year? (Dane Reinhardt, Baird)

  A: The shift is considered in the guidance, with expectations of continued demand for corporate brands. The company anticipates maintaining momentum in market share recovery and specialty product growth. (Ronald South)