Release Date: May 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Henry Schein Inc reported solid earnings for Q1 2024, driven by gross margin expansion and a strong recovery from the previous quarter's cyber incident.
- The company's recent acquisitions have positively contributed to profitability in the first quarter.
- Henry Schein Inc is affirming its expectations for 2024 non-GAAP diluted EPS and 2024 adjusted EBITDA growth, reflecting confidence in continued financial performance.
- The THRIVE Signature program in the U.S. has contributed to sales growth, with membership increasing significantly.
- Henry Schein Inc has seen strong growth across dental specialties such as oral surgical products, endodontics, and orthodontics, largely driven by acquisitions and organic market share gains.
Negative Points
- Sales of PPE products continued to decrease, primarily due to lower glove prices compared to the previous year.
- The cyber incident from the last quarter negatively impacted merchandise sales growth by low to mid-single-digit percentages during Q1 2024.
- Global Dental equipment sales were only consistent with the prior year, with a slight decrease in international equipment sales.
- The company experienced a decline in GAAP operating margin by 101 basis points compared to the prior year, indicating increased costs or reduced efficiency.
- Henry Schein Inc's first quarter results still reflect challenges from the cyber incident, impacting sales growth and operational aspects.
Q & A Highlights
Q: 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. It doesn't seem like segment mix explains the entirety of that margin result. So just wondering if you can unpack for us the drivers here that pushed you to nearly 32% gross margin in the quarter?
A: Ronald N. South - Henry Schein, Inc. - Senior Vice President and Chief Financial Officer: Jason, I'll start and I'll let Stanley jump in if anything he wants to add on this. I think it is largely mix. I mean we have had a little bit of a depression in the distribution businesses as we continue to come out of the cyber incident. We're happy with the growth we're seeing in value-added services. Very happy with -- while it has been a challenging end market on some of the specialty side, but some of the growth we're getting there. So the mix on the top line is helping with that gross margin. But it is consistent with our strategy. That's why we did the acquisitions we did last year. These are higher-margin businesses. And as we said in the prepared remarks, these businesses will start contributing to growth on that gross margin. Will it be the same for the balance of the year? A lot of that will depend on the ongoing recovery that we're seeing in the distribution businesses. But I do think that it is consistent with our expectations and with the strategic plan.
Q: 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 under indexed 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?
A: Stanley M. Bergman - Henry Schein, Inc. - Executive Chairman & CEO: 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. While the implant end market is experiencing selective pockets of price sensitivity, and that's mainly in the full arch implants, I think it's very important to understand that this has not directly impacted our business. As our price point is lower than other premium brands, and our customers are generally less focused on the full arch procedure. I think that's very, very important. There are small groups of customers that are focused on price, the value offering and that we have listened to compete with now. Our product line has generally been well priced in the premium area. I think some of our competitors have had to come down to our pricing. But overall, generally, we're very well priced in the premium area. We've been viewed as a discounter if you will of premium products and the quality of our products are very good and available at relatively favorable pricing to both private practitioners and DSOs. So I think the part of the market we participate in has not really been as impacted from our point of view as perhaps some others. Of course, the favorable launch in Germany of the iSy 2.0implant system, qualitatively, it's good. It's a good price. It has helped us in Germany where we have a very strong market share. And when we introduce new products, they're generally well received in Germany. The customers understand that the value is good and the product is well tested. And we actually think that with customers being focused practitioners on price, we are well positioned to expand our market share. Continue to expand, if you will. And we have, in the United States, this new bone level implant with a deep conical connection, has proven technology that we believe will expand our market position and our opportunity quite significantly in North America, U.S. to start with, with this addressable market that we really haven't been able to address could be as much as 40% to 50% of the market that we haven't been able to address that we will be able to address with our new product launch later this year.
Q: Just on the technology side, I appreciate that the Change cybersecurity event impacted the business a little bit here. 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?
A: Ronald N. South - Henry Schein, Inc. - Senior Vice President and Chief Financial Officer: 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. We have seen the company return to a more normal level of growth since then. So to your original question, yes, we would -- our expectations for Henry Schein One and on the technology side was that there would be better growth than that 3% plus you saw in the LCI. So we do expect that to be higher. And as we come out of the kind of the disruption that was caused by the Change management cyber incident, we believe that we will achieve that projection. It did -- the Change management issue was interesting in the perspective that it did create a bit of a cash crunch for some of our customers, we were able to help alleviate that through some assistance through revenue cycle management tools that we had. But we did also extend terms to some customers. We also did seek -- they pulled back on perhaps acquiring new technology products for a period of time, and that's where we saw the stagnation in revenues in Henry Schein One. But I do think that and quite frankly, we expected -- overall, we expected, for example, to have better operating cash flow in the quarter, but our receivable balances were still slightly more elevated than what we originally expected because of a lot of practices that we're kind of managing cash as they work their way through that disruption. But we're seeing things get back to normal with that. So I do believe that our technology business and as we mentioned in the prepared remarks, there are some new products, some new software products that will be -- that we're introducing to customers that we think will continue to support that growth going forward.
Q: How are you seeing the competitive balance for -- between distributors in the alternative side of care market and how that's driving
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
