Q3 2024 Earnings Summary
- Henry Schein is recovering from the cyber incident, regaining customers, and growing market share in its core distribution business, particularly in the medical segment, leading to a stable and improving performance.
- The company is experiencing strong growth in its high-margin implant business, notably in North America with the adoption of the BioHorizons tapered pro conical implant, and is gaining market share in Europe, indicating solid momentum in this segment.
- Operational efficiencies and restructuring initiatives are leading to significant cost savings, with expectations of operating margin expansion in 2025, as lower operating expenses offset increased depreciation, positioning the company for improved profitability.
- Henry Schein is still recovering from a cyber incident that resulted in the loss of customers to drug wholesalers in its medical business. The company acknowledges that it "did lose some customers, specifically lost some to drug wholesalers" and needs to regain some pharmaceutical distribution business.
- There is a market shift towards lower-priced alternative brands and generic products in the dental market, which may impact Henry Schein's sales revenue and margins. Customers are moving towards "lower-priced alternative brands and our own brands," leading to "stable to slightly reduction in dollar sales" despite units increasing in low single digits.
- The company's operating margin expansion in 2025 is uncertain and depends on achieving revenue growth in the distribution business, which may face challenges. Management states that "we need to see what kind of momentum we have... before we can commit" to operating margin expansion, indicating potential risks to profitability improvement.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Total Sales Growth | FY 2024 | 4% to 6% | 4% to 5% | lowered |
Non-GAAP Diluted EPS | FY 2024 | $4.70 to $4.82 | $4.74 to $4.82 | raised |
Adjusted EBITDA Growth | FY 2024 | Low double-digit percentages | Low double-digit percentages | no change |
Non-GAAP Effective Tax Rate | FY 2024 | 25% | 25% | no change |
Operating Income from Specialties | FY 2024 | Over 40% | No guidance | no current guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Total Sales Growth | Q3 2024 | 4% to 6% year-over-year | 3,174/Vs. 3,162In Q3 2023 → ~0.38% growth | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Cyber incident recovery and market share recapture | Extensively discussed in prior quarters, consistently noting slower-than-anticipated recapture, but with month-over-month improvements and continued confidence in regaining lost share | Steady but slower-than-expected recovery; consecutive improvements in market share and optimism for further gains into 2025 | Ongoing, gradual improvement |
Consumer price sensitivity and shift to lower-cost/private label brands | Previously highlighted as well, with customers growing more price-conscious, shifting to lower-cost options and private label brands. Consistent theme since Q4 2023 | Consumers increasingly evaluating lower-cost alternatives, particularly private label, with minimal negative impact on profitability | Consistent, continuing shift |
Restructuring initiatives targeting $75–$100 million in run rate savings | Introduced in Q2 2024, aiming for $75–$100 million in annual savings; partial updates in Q1 related to general restructuring expenses; not mentioned in Q4 2023 | Achieved $50 million of annual run rate savings; plan remains on track for margin expansion into 2025 | Ongoing, progressing |
Dental implant business momentum and new product launches | Consistent momentum in prior quarters, with new implant launches delayed approval in Q2, expansion of implant product lines in Q1, and broad global growth mentioned since Q4 2023 | BioHorizons tapered pro conical implant drove mid-single-digit growth; launch of SmartShape Healers to attract new customers; strong performance in Europe and U.S. | Continuing, positive trajectory |
Medical business stability and growth | In prior periods, stability highlighted but slower recovery from cyber incident; Home Solutions and ASCs repeatedly identified as growth drivers | Stable market with sequential share gains post-cyber incident; strong Home Solutions and orthopedic segments; some impact from lower demand for flu/COVID products | Stable, continuing recovery |
Orthodontic business restructuring (Reveal to Smilers) | Mentioned in Q1 2024 regarding the introduction of Smilers and challenges around Reveal; not specifically referenced in Q2 or Q4 | Transition from Reveal to Smilers aligners, aiming to reduce costs and leverage better product/technology; expected to smooth out over a few quarters | Resurfaced, moving to single brand |
Digital dentistry and AI technologies | Previously emphasized AI-driven diagnostics and cloud-based practice management solutions in Q2, Q1, and Q4, with notable growth in digital equipment and software | Not specifically discussed apart from noting continued interest in digital equipment; no explicit AI updates | Less emphasis this quarter |
Dental equipment sales impacted by interest rates | Mentioned in Q1 regarding high interest rates slowing large equipment purchases; limited references in Q2; not discussed in Q4 | Interest rates cited as a factor: a 100–200 basis point reduction could significantly boost sales | Continuing impact on equipment sales |
Margin expansion and margin pressure | Margin dynamics consistently noted across prior quarters: gross margin buoyed by high-margin products but operating margin pressured by costs, slower distribution recovery, and lower PPE sales | Margin expansion expected in 2025 from restructuring, though higher depreciation is pressuring margins now; Q3 GAAP operating margin down year-over-year | Ongoing, balancing factors |
Acquisitions and integration (e.g., SIM implants, Shield) | Previously detailed with SIM and Shield integrations in Q1 and Q4, both described as accretive; Q2 mentions restructuring to integrate acquisitions | General statements on productive acquisitions; no direct mention of SIM or Shield; references to annualizing prior deals and continuing M&A strategy | Continuing, less specificity in Q3 |
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2025 Guidance Expectations
Q: Should we lower 2025 revenue and EPS estimates?
A: Management suggested that current Street estimates of over 4% revenue growth and nearly 11% EPS growth for 2025 might be optimistic. They recommend awaiting February guidance, as market momentum and market trends will influence projections. -
Margin Improvement and Restructuring Savings
Q: Will margins improve next year despite restructuring and depreciation?
A: Management expects operating margins to improve in 2025. They believe that restructuring savings of $75 million to $100 million by the end of 2025 will more than offset higher depreciation expenses. -
Capital Allocation in 2025
Q: Will capital allocation in 2025 match prior years?
A: The company anticipates capital allocation in 2025 to align with historical trends, including $300 million to $400 million for share repurchases and similar amounts for M&A, with potential for accelerated debt reduction. -
Dental and Medical Market Outlook
Q: What's driving your optimistic outlook for 2025?
A: Management foresees stable to improving dental and medical markets in 2025, driven by practitioners investing in digital technology, steady equipment sales, and potential benefits from lower interest rates. -
Market Share Recovery
Q: Will market share recovery boost consumables next year?
A: The company expects continued market share recovery in distribution businesses, potentially providing tailwinds in consumables, especially in the first half of 2025. -
Implant Business Performance
Q: What's behind the strong implant performance?
A: The introduction of the tapered pro conical implant and increased confidence among sales teams are driving strong implant sales, leading to market share gains in North America. -
Competitive Environment and Pricing
Q: Are dental manufacturers becoming more competitive?
A: There's a trend of consumers opting for lower-priced alternatives, prompting manufacturers to compete more aggressively. This may impact pricing dynamics going into 2025. -
Medical Business Trends
Q: How is the medical segment performing?
A: The medical business is stable, recovering from past challenges. Growth is expected in areas like home care and orthopedics, with positive trends in ambulatory surgical centers. -
Technology and Value-added Services
Q: What's causing headwinds in value-added services?
A: Timing issues and a shift from on-premise sales to SaaS models are affecting reported revenues. However, the business is growing, and these effects are expected to normalize. -
Clear Aligner Business Restructuring
Q: What's happening with the clear aligner business?
A: The company is transitioning from the Reveal brand to Smilers, consolidating offerings to leverage a better product and reduce costs, though it may take a few quarters to fully implement.
Research analysts covering HENRY SCHEIN.