Henry Schein, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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.
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.
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.
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.
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.
[Operator Instructions] And the first question comes from the line of Jason Bednar with Piper Sandler.
Stan or Ron, I wanted to start on gross margin. That was really the biggest positive surprise in the quarter to us. By our model, you're at a record high, and that's in spite of volumes maybe being a touch lighter than we would have thought.
Jason, I'll start and I'll let Stanley jump in if anything he wants to add on this.
So thank you, Ron. Jason, as you know, we have been investing in high-growth, high-margin businesses for the past several years. We -- last year, we had quite a bit in that direction. Not all of those have been in place for the full year. But in general, the mix towards high growth, high margin has increased. Number one.
All right. Very helpful, both of you. And then as a follow-up, I wanted to ask on dental equipment. I know the message last quarter was one of a shortfall in deliveries tied to the cybersecurity incident. A lot of that business would shift into the first quarter and eventually be realized dental equipment didn't show as much growth as what we were looking for. What was the shift out of the fourth quarter, maybe just simply not as large as we would have thought we were just over modeling that? If I guess, was that consistent with your expectations, what you saw in the first quarter?
It was hard to gauge exactly how much business will flip from 1 quarter to the other, Jason. Remember also our equipment people in the fourth quarter last year we're very much engaged in providing support to customers during the incident period.
And the next question comes from the line of John Block with Stifel.
Stanley, maybe you could provide some more color on the implant market growth and how you're faring from a share perspective. I don't know, maybe that worldwide market is growing low single digits. It seems like you guys grew low single digits in implants in the quarter on an organic basis, but I think you're underindexed in China relative to peers where a good amount of growth came from in terms of the other players. So do you feel like you're capturing share more prominently sort of on an apples-to-apples basis where you guys actually compete? And then I'll ask my follow-up.
Yes. It's a very good question. I'm glad you asked it, which is a lot of confusion. First of all, we do not really participate in a significant way in the Chinese market. We do have -- our Medentis business does some work in China. We have a little bit of Camlog and that business has not really been impacted, it's relatively small.
Got it. That was great. That was very helpful. And maybe just a quick one, Ron, for you. The Street was 9% or even below that top line. We were at 8% for 2024 anyway. But I'm just still looking for a little clarity on where the top end of the sales guidance is, call it being locked off.
Yes, John. It's not -- there's not a whole lot of fluctuation that we're expecting on FX. I think we can kind of carve that piece out, that might be a minor impact. We still expect acquisitions to have a similar contribution than what we were saying with the original guidance as well.
And the next question comes from the line of John Stansel with JPMorgan Chase & Company.
Just on the technology side, I appreciate that the change cybersecurity event impacted the business a little bit here. A, is it the right way to think about performance impact as kind of the difference between that 3.2% global internal growth and say, like a mid-single to high single-digit growth number that you would kind of have been producing over the last few quarters?
Yes, John, on the Change Healthcare effect, what we did see with Henry Schein One is that we had a relatively steady revenue growth during the quarter that stagnated a bit in March. And that's -- we attribute it to what we saw with Change.
John, let me just add 1 more comment to what Ron said and Ron provide a very good outline.
Great. And then just 1 on the medical distribution business. There's been a lot of discussion in the market, albeit more on the inpatient side or for medical distributors around kind of competitive balance and different net wins on contracts.
I don't think that's an issue for us. There's a lot going on, I think, with some of the other parts of distribution on the drug side. Maybe on the medicine side, with acute care settings.
And the next question comes from the line of Jeff Johnson with Baird.
I wanted to talk about the North American dental consumables number that you put up, the down 5%, I think if we adjust for that cyber number, you said 300, 400 basis points down 1% to 2%. That fits pretty well with some of the independent industry data that came out in 1Q.
Jeff, you're asking, again, another good question here. I think pricing is relatively stable. If you look at raw data and we look at that, of course, from our database, inflation is maybe 1% to 2%.
All right. That's helpful, Stanley. And then, Ron, maybe just 1 quick follow-up, just on that 300 to 400 basis point cyber impact.
Yes. To answer the first part of your question, Jeff, yes, the spread and the impact on Dental and Medical is pretty consistent, right? It's not the 1 bearing the brunt more so than the other.
And the next question comes from the line of Elizabeth Anderson with Evercore ISI.
I was looking on the medical environment. We have heard of higher sort of some outpatient utilization trends broadly in the market.
So Elizabeth, I think the shift from the acute care setting to the alternate care setting for procedures continues. I don't think it was more profound this quarter than the past year or 2.
Got it. And then maybe as a follow-up, as we sort of think through some of the cost cuts, et cetera, as your moving on, one of the things it seems like SG&A was a touch higher than at least we were modeling here in the quarter.
Yes. Elizabeth, the SG&A, the whole kind of mix of the P&L of some of the businesses that we acquired last year are going to be a little different, right?
And the next question comes from the line of Mike Petusky with Barrington Research.
So Stanley, I'm wondering, you've had PRISM for a few years and Shield I think for a couple of quarters. I'm just curious, home health, obviously, large end markets, presumably opportunities for above-average growth. I'm just curious.
Thank you, Mark. Thanks for that question. Home Care Solutions continues to be a big area for us going forward. We continue to expect to grow organically, make some additional investments. Our business is approaching $350 million annually, $20 million a month or so. And we expect that to continue to grow nicely from an organic point of view, and we will add to that platform.
Okay. Great. And then just shifting to Dental. I guess one of the benefits of talking to anybody at Henry Schein or leadership at Henry Schein, there's a lot of folks, including yourself, Stanley, that have been in the chair for a long time. You've seen different markets and different challenges and all the rest.
Yes. I think, it's a very good question, too. The dental markets are relatively stable. If you look at the U.S. patient dental traffic in January and February was impacted by weather and some seasonal viruses, including the flu, but improved beginning in March and again an improvement continued through the quarter into April.
And the next question comes from the line of Justin Lin with William Blair.
Sort of a similar question to what sort of came up earlier, but slightly different. Your Technology segment organic growth, I think, came in lower than the Street, but the reported number was relatively in line.
Yes. Justin, the -- that segment includes other value-added services businesses, some of which we have acquired in the last year. So that showed up in the acquisition growth from those value-added services businesses who did have very good quarters.
Okay. Got it. And I guess more of a high-level question here. You obviously made a number of acquisitions. Anything you would call out. Surprising whether positive or negative relative to your expectations over the past few quarters?
We've been happy with all of them, some do better than others in the early stages. We are busy integrating our large implant acquisitions we did last year, Biotech, which has now annualized. That will show up as internal growth beginning in the second quarter.
We have time for 1 last question coming from the line of Kevin Caliendo with UBS.
A lot of comments around April and the back half of the year and new product launches and like there's so many moving parts with M&A and the like.
Yes. So as we've said before in the prepared remarks, Kevin, that we do expect sales growth to be more significant in the back half of the year than what we see in the first half of the year.
Okay. That's helpful. And if I can just do a quick follow-up on the implant, the new products. What does this do to your portfolio of products? Is it improving what you had, sort of -- I've always envisioned that you're sort of between value and premium.
In the U.S., we're expanding and we're going into about half the market that we do not cover today. We're waiting for finalization of the approval. We expect that in the second half of the year.
And ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.