漢瑞祥 (HSIC) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein fourth-quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Carolynne Borders, Henry Schein's Vice President of Investor Relations. Please go ahead, Carolynne.

Thank you, operator. And my thanks to each of you for joining us to discuss Henry Schein's fourth-quarter results. With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein, and Steven Paladino, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the Company's business may affect the matters referred to in forward-looking statements. As a result, the Company's performance may differ from those expressed in, or indicated by, such forward-looking statements. Also, these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 13, 2013. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

I ask that during the Q&A portion of today's call, you limit yourself to a single question and a follow-up before returning to the queue. This will provide the opportunity for as many listeners as possible to ask a question within the one hour we have allotted for this call. With that, I would like to turn the call over to Stanley Bergman.

Good morning, and thank you, Carolynne. Our fourth-quarter financial results were highlighted by strong profitability, with growth in diluted earnings per share of approximately 10%. We also are very pleased to be affirming guidance for 2013 that represents earnings-per-share growth of somewhere between 8% and 11%, in that range, compared with our 2012 results, and of course, excluding restructuring costs. Once again, we believe we've gained market share during the quarter in each of our business groups, driven by strong domestic results across the board, and despite some challenges in certain overseas markets.

Looking at our financial results for the year, there are a number of highlights worth noting up front. Sales in 2012 increased 4.8% to just shy of $9 billion, while internal sales in local currencies were up 5.1% on a comparable basis. 5.1% is at least twice the market growth rate in the markets that we serve. Diluted earnings per share increased nearly 12% to $4.44, excluding the restructuring costs, on an apples-to-apples basis. I'd like to point out that earnings per share for the year was $0.10 above the top of the guidance range we originally established back in November of 2011. So, clearly, 2012 was an excellent year for Henry Schein and for Team Schein indeed.

We also completed a number of strategic acquisitions during 2012 involving each of our four global business groups. As well, we are particularly proud of the fact that Henry Schein now serves more than 1 million dental, medical, and animal health practitioners around the world. That is a significantly greater number than any other company in our space.

I'll speak in greater detail about our fourth-quarter and full-year accomplishments in a moment. Suffice to say is we are very, very pleased with our performance, and we feel very comfortable with where the Company's heading, in fact, very excited with the direction. Our strategic plan that we started with for the period January 1, 2012 and ends December 31, 2014, is well under way, both from an organizational point of view, we are aligned to support the strategic plan goals, and also from an operational point of view, we have made significant progress in 2012 advancing the strategic plan.

So, very, very excited with where we're heading, very comfortable with the direction and with the team. And so, Steven, perhaps give us some specifics on the financial side, and then I'll return a little later with some more color on the business units.

Okay, thank you, Stan, and good morning to all. I am also very pleased to be reporting strong financial results and sales growth for the fourth quarter of 2012. Let me point out that the fourth quarter of last year, 2011, included one additional selling week compared with the fourth quarter of the current year. This occurs for Henry Schein once every six years, given that we are on a 52-, 53-week fiscal year end, and the year end is the last Saturday of December each year. We previously discussed this impact as it related to our 2011 growth versus 2010 on last year's Q4 call. So, we have estimated the impact of the extra week on sales, and in order to provide a more meaningful analysis, I will be discussing our internal sales growth in local currencies and adjusting for the impact of the extra week in last year's fourth quarter.

Turning to our financial performance. Net sales for the quarter ended December 29, 2012 were $2.4 billion, reflecting a 2.9% increase compared with the fourth quarter of 2011. This consisted of internal growth in local currencies of 6%, acquisition growth of 5%, and decreases related to foreign currency exchange and the extra week impact of 0.6% and 7.5%, respectively. Our sales of seasonal influenza vaccines did not have a material impact on our sales growth for the fourth quarter. Please note that we have provided the details of our sales growth in exhibit A of our earnings news release that was issued earlier this morning.

Our operating margin for the fourth quarter of 2012 was 7.5%, and increased 55 basis points compared with the fourth quarter of 2011. If we exclude the impact of current-year acquisitions, our Q4 operating margin expanded by a greater amount, by 78 basis points, and that was driven by strong domestic sales growth. Our operating expenses as a percentage of sales improved by 89 basis points, as we continue to control and leverage our expense structure. The operating expense improvement was offset by a small decline in gross margin of 34 basis points, and that was due primarily to higher sales growth in our Animal Health business, that's lower margin, as well as some product mix changes across all of our business groups.

Our effective tax rate for the quarter was 30.6%, which is in line with our previous guidance, and down slightly from the 30.9% in the fourth quarter of 2011. For 2013, we estimate that our effective tax rate will be in the 30% to 31% range for the year.

Net income attributable to Henry Schein Inc for the fourth quarter of 2012 was $112.5 million, or $1.26 per diluted share. This represented an increase of 7.4% and 9.6%, respectively, compared with the fourth quarter of 2011. Also, please note that foreign currency exchange had a negative impact on EPS for the quarter, and that negative impact was approximately $0.01 per year versus the prior year's quarter.

If we take a look at our financial performance for the year, in addition to the items that Stanley just highlighted, we are pleased to have achieved an increase in operating income of nearly 9%, and expansion of our operating margin of 27 basis points, which excludes restructuring costs, and 41 basis points on a full-year basis, also excluding the impact of acquisitions during 2012, the first year acquisition. This margin expansion is in line with our stated corporate goals. I'd also like to point out we achieved our stated goal of operating cash flow for the year in excess of bottom-line net income, and that was despite approximately $150 million of forward inventory buy-ins that we did during end of Q3 and beginning of Q4, which was in advance of potential price increases related to the medical device excise tax, which became effective on January 1.

So, now I'd like to provide some detail on our sales results for the fourth quarter. Our Global Dental sales for the fourth quarter were -- showed a decline of 2.4% to $1.3 billion. The components are internal growth in local currencies, an increase of 3.6%, acquisition growth 2.6%, offset by decreases related to foreign currency exchange and the extra week impact of 0.9% and 7.7%, respectively. Our overall Dental sales growth in local currencies continue to exceed our estimates for what the market growth was. The 3.6% internal sales growth in local currencies in our Global Dental business is comprised of 7% growth in North America and a decline of 1.5% in the international markets.

Let me now discuss some detail behind both of those figures. The 7% North American growth included 0.9% growth in sales of Dental consumable merchandise products, and 21.9% growth in Dental Equipment sales and service revenue. Our equipment growth in the North American dental market continued to be very broad-based, and had particular strength in sales of both traditional equipment and CAD/CAM products. The 1.5% decline in our International Dental markets included growth of 2.2% in consumable merchandise, and a 9.2% decline in Dental Equipment sales and service revenues. The decline in equipment sales in our international market reflected economic challenges in some markets in Europe, as well as Australia. We also believe that equipment sales were negatively impacted in Germany because of the timing of the IDS trade show in Cologne, which is at the end of Q1.

Our Global Animal Health sales were $611.2 million in the fourth quarter, an increase of 16.1%, and this included internal growth in local currencies of 10.6%, acquisition growth of 13.7%, and decreases related to foreign exchange and the extra week impact of 0.3% and 7.9%, respectively. This 10.6% internal growth in local currencies included 18.4% growth in the North American market and 3.1% growth in our international markets. The North American growth was primarily driven by sales of parasiticides, as well as certain vaccines. Again, we believe we continue to gain market share in the Global Animal Health business unit.

Our Global Medical sales were $402.4 million in the fourth quarter, which was an increase of 1.1%. This consisted of internal growth in local currencies of 6.9%, acquisition growth of 1.4%, and decreases related to foreign exchange and the impact of the extra week of 0.3% and 6.9%, respectively. The 6.9% internal growth in local currencies was comprised of 7.2% growth in our North American market and 2.9% growth internationally. Here also we believe we continue to gain market share in the North American business segment, which accounts for more than 90% of our Medical Global sales.

Turning to our Global Technology and Value-Added Services sales. They were $81.4 million in the fourth quarter, which was an increase of 15%. This included internal growth in local currencies of 13.5%, acquisition growth of 6.5%, a slight increase related to foreign currency of 0.2%, and a decrease due to the extra week of 5.2%. The 13.5% internal growth included 15.7% in the North American market, and had particular strength in both our Technology and Financial Services recurring revenue segments, and a 1% decline in the international market.

During the quarter, we continued to repurchase our common stock in the open market. Specifically, we repurchased approximately 1.1 million shares during the quarter at an average price of $79.50 per share, which approximated $84.2 million in cash. So, in total, we bought back $300 million of our common stock during the year for the full-year 2012, and this was consistent with our guidance and actually at the high end of our guidance of $200 million to $300 million. The impact on the current year's quarter's repurchase was not material; it was less than $0.01 per share. Also, it's important to note, at the close of the quarter, at the year end, we still had $300 million authorized for future repurchases of our common stock, and again, we continue to expect to repurchase between $200 million and $300 million of common stock during fiscal 2013.

If we take a brief look at the highlights of our balance sheet and cash flow for the quarter, operating cash flow was just under $200 million, which compares to $277.8 million last year. Operating cash flow for the year was $408.1 million. And as I mentioned a little bit earlier, we are pleased to have achieved our stated goal of having operating cash flow for the year in excess of our bottom-line net income, and that's even with the negative impact of inventory forward buy-ins during the quarter in advance of medical device excise tax going effective at the beginning of the year. Again, we completed about $150 million of forward buy-ins during the quarter, and that had a direct impact on cash flow. So, excluding that cash flow would be $150 million higher. We expect to get to normal inventory levels by approximately mid-year 2013.

Looking at our accounts receivable days sales outstanding, they were 38.9 days for the quarter; that's down slightly from 39.3 days last year. On a full-year basis, DSO was 39.8 days, and that's also down slightly from 40.6 days last year. Our inventory turns for the fourth quarter were 6.1 turns; that's compared to 6.8 turns last year. On a full-year basis, they were 6.2 turns, and that compares to 6.7 turns last year. Again, inventory turns were negatively impacted by that forward buy-in of $150 million during the quarter.

Capital expenditures for the year of 2012 were $51 million. We expect CapEx for 2013 to be approximately $60 million to $65 million. And this increase is primarily because of an increase of a new facility that we expect to bring online in the United Kingdom, and that's approximately $15 million.

I would like to conclude my remarks by affirming our 2013 financial guidance as follows. For 2013, we expect diluted EPS attributable to Henry Schein to be $4.81 to $4.91, which represents an 8% to 11% growth compared with our 2012 results. It's also important to note that we expect our EPS growth during the year to accelerate over the course of the year.

At the end of the first quarter of 2013, we mentioned in our press release that we intend to refinance our debt related to the Butler Schein Animal Health transaction a couple of years ago. This refinancing is expected to reduce our overall interest expense and improve cash flow, and we expect it to be accretive by between $0.02 and $0.03 on an annualized basis; that's dependent on when we lock in rates, and that's still something that we'll do later in this quarter. As part of this refinancing, there is a one-time non-cash charge of approximately $0.04 to $0.05 per diluted share, and that -- our guidance excludes that one-time nonrecurring charge.

Also, as always, our guidance is for continuing operations, as well as any completed or previously announced acquisitions, but does not include any future acquisitions. Lastly, it's important to note that in determining our guidance for 2013, we took what we believe is a realistic and somewhat conservative view of foreign currency exchange rates, and we assumed that there would be continued economic challenges in some parts of the European Union, and therefore, we're hoping to have a slight conservative bias to our guidance because of those uncertainties.

So with that, I'd like to turn the call back over to Stan.

Thank you, Steven. Let me review with you some highlights from the quarter and the year for each of our four global business groups. So, starting with the Dental Group, we are delighted to report the continued strength in our North American Dental Equipment with growth of nearly 22%; of course, adjusted for that extra week. And overall growth in North America Dental sales of 7%. As Steven mentioned, while the International Dental merchandise growth was healthy, a decline in equipment sales reflects a cautious spending environment in much of Europe, in particular in Germany and the Netherlands, as well as some weakness in Australia.

Having said this, we are quite excited about the IDS meeting, which takes place at the end of this quarter. And as we know from historical purchasing patterns, we tend to have a depressed fourth quarter -- no, first quarter in equipment sales in the year of the IDS. That's the fourth quarter, the year before, and the first quarter of the IDS. So, hopefully, and we anticipate a far more robust second quarter European, and particularly German equipment sales as a result of the IDS meeting which, again, takes place at the end of this quarter.

We did kick off 2013 with our Annual Dental Field Management meeting in the first quarter of January. More than 170 Team Schein dental managers gathered to discuss our dental strategy going forward into 2013. At that meeting, I took the opportunity to introduce some Company themes for 2013 and beyond, all based on our strategic plans -- our strategic plan for this period. These include the need for Henry Schein to become even more relevant to our customers, and the necessity of change and reinvention in the dental marketplace.

Of course, Henry Schein is committed to being the global leader in providing clinical solutions to general dentists, and to a greater extent, to specialists. We are committed to the reinvention of dentistry through digital prosthetics. In fact, at the Greater New York Dental Meeting in November, we introduced a whole new concept of digital prosthetics, a program centered on the theme of choices that connect. We are quite clear that we need to offer our customers options in connecting to the new digital world that they're going to experience, whether it's in the image area or specifically in the prosthetics area. And just like we are committed to continuing to be the leader in the practice solutions area in dentistry, as well as on the imaging side, we are committed to being the world leader on the digital prosthetic side as well.

Our dental team is clear that to achieve our goal of Global Dental leadership in clinical solutions, we need to advance a number of key initiatives. We believe we are uniquely positioned to achieve this goal as we continue to pursue a number of these initiatives. We believe we have more different tools required to advance this goal in our armamentarium, really than any other dental company in the world.

So, we would like to advance, as part of our strategy, our global leadership position in the practice management solutions and electronic medical records arena in dentistry, and in providing specialty oral surgery, orthodontic, and endodontic products, and of course, the related services that are used by dentists, whether they're GPs or specialists. Of course, an educational protocol for dentists on the importance of dentistry in the entire continuum of healthcare, not just on the restoration side. And while we are relatively new to the global dental implant market, we believe we are uniquely positioned to establish ourselves as the leader in the tooth replacement sector. We will have the right mix of hardware and software, and our sales team will be the trusted advisors who introduce and stand behind the digital prosthetic solutions.

We are committed to this. This is where dentistry is heading. And just like we were committed to becoming the leader in the practice solutions arena, software, and we achieved that, and the leader in full service, we now of course, sell more dental imaging and dental chairs than any other company in the dental space. Likewise, we are committed to advancing our prosthetics platform, and will achieve -- and are committed to achieving and believe we will achieve similar results. To round out our commitment to solutions-based leadership is the firm, wide focus on excellence in customer service and support. More of this, of course, as the year goes by, but this is an area we are firmly committed to.

During 2012, we stepped up our use of social media to interact with all our constituencies, including of course, our suppliers, our customers, and various corporate audiences. Our use of social media has been particularly active with our US dental customers, including weekly Twitter chats moderated by industry experts on topics as diverse as oral health and systemic health, team harmony in the office, and office aesthetics. We used YouTube during the fourth quarter for cross-publication of our Recovery Empowerment Symposium information. Of course, this was the result of services we offered in the aftermath of Superstorm Sandy. We'll always be there for our customers, and believe that we are viewed as, in fact, the one-stop shop whenever these kinds of sad situations occur; dentists, doctors, and physicians view us as their resource. And we are connected with customers via a light-hearted contest to name our Facebook community mascot. We will continue to leverage the cost effective reach of social media during 2012 and, of course, beyond.

Also, as has been mentioned, the dental specialty markets are important to our growth strategy, and during 2012 we strengthened our global orthodontics business with the acquisition of Ortho Technology, which has annual sales of about $26 million with some nice synergies between Ortho Organizers and Ortho Technologies, great complementary opportunities. We, of course, acquired Ortho Organizers in March of 2009, and that Ortho Technologies sells products primarily to orthodontists, while Ortho Organizers largely services the GP dental profession. Today, our orthodontic sales are, just on the specialty products, about $75 million annually. Of course, we sell a lot more in products to orthodontists, but in the specialty orthodontic space, we already are running at the rate of $75 million.

Also, last year we acquired a 75% interest in Accord, which has annual sales about $16 million, and established our presence in Thailand, of course, in a leadership position. Accord also serves as the anchor for further expansion into Southeast Asia, and Thailand marked the 26th country that Henry Schein has operations in, and affiliates. Asia becomes more important to Henry Schein in the years to come, as we advance our market position in this important market in general. That's a little about the dental world.

Now, on the Global Animal Health side, we continued to gain market share during the fourth quarter with accelerated internal growth in North America. If we exclude the extra week, you'll see that the internal growth in local currencies was pretty good -- North America, over 18%, and even on the international side we experienced good growth, healthy growth of about 3.1%. Lastly, we made three -- that was all internal, by the way.

Last year we made three strategic Animal Health acquisitions in Europe, in the UK. Just before the year end we completed our acquisition of C&M Vetlink, annual sales of $55 million. This made Henry Schein a leading veterinary distributor in Ireland, and reinforced Henry Schein Animal Health UK base in the UK. Our veterinary business now has a presence in 11 countries worldwide, including 9 in Europe, plus the United Kingdom.

Between the second and fourth quarter of 2012, we acquired AUV Veterinary Services, with annual sales of about $270 million. AUV brought us a leading presence in the Netherlands and Belgium, and advanced, of course, our Pan-European strategy. We hope to expand on that platform in the years to come, and are very, very excited about us being really the only animal health distributor with a significant geographic and sales footprint on both sides of the Atlantic, and of course, in Australia and New Zealand.

This year started off well from an increasing of the geographic footprint as well. So, we started last year, of course, with the Veterinary Instrumentation acquisition. This is part of our strategy to not only increase the geographic presence, but also to add important products with higher margins through these geographic stores, if you will. The leading supplier of veterinary instruments, the leading supplier of surgical instruments, implants to veterinary surgeons in the United Kingdom, about $10 million in sales. These products are now being expanded for distribution in the rest of the Schein network.

The acquisition held strategic importance as we have subsequently been able to bring the portfolio of high-quality specialty products to growing professionals, as I said, across Europe and the US and also [Asia]. So, on the Animal Health side, we continued to expand our physical presence, but at the same time doing well on our internal growth and adding higher-margin products, such as surgical instruments and, of course, software, which we've spoken about in the past.

Now let me talk a bit about our Global Medical group, where the results continued to be very good. The growth in North America was significantly higher than third quarter, and our international group, although small, returned to positive growth in local currencies, of course, adjusting for that extra week. Let me point out that the North America group represents 95% of our Global Medical sales in this space.

The flu side -- we sold approximately 1.4 million doses of influenza vaccine during the quarter. I think that was expected. We gave some indication on the last call on that. Making a total of 8.3 million doses for the full year. As we discussed last quarter, the profitability for this product line was significantly greater in 2012 than '11. I think we discussed this well over a year ago, that we expected this to be the case.

On the strategic side, in July we acquired Modern Laboratory Services, sales about $22 million. This transaction support our continued commitment to the physician and clinical laboratory market, and strengthened our position in the US West Coast, an area of exciting opportunity from a growth point of view, and an area where Henry Schein has traditionally been underpenetrated. MLS also advanced our goal of gaining market share and adding knowledgeable management through our strategic acquisition. I would say this was an important strategic acquisition, as it was not only increased our footprint, but management, product offering, and satisfies an important business niche from a Henry Schein Medical point of view.

Now, let me conclude a bit with our Technology group. Sales growth accelerated during the quarter in North America, which represented 90% or so of the Group's revenue, with particular strength on the recurring revenue streams on both the Technology and Financial Services side of the business. Having said that, we did experience some challenges in Europe, due to some of the economic concerns. We are committed to utilizing advanced technology and software to help all of our customers run more efficient businesses; that's in the Dental, Medical, and Animal Health side.

Late in the third quarter of 2012, towards that goal, we acquired the majority interest in the Exan Group, which is a Canadian dental software company with annual revenues of about $12 million. Many of these acquisitions are far more valuable from a strategic point of view than the sales at the time of the acquisition or investment. We are very optimistic about the growth opportunity for the Exan line, as it complements our enterprise business on the software side, as well as on the consumable and equipment side, and provides access to dental schools for special markets merchandise. Exan is by far the leading provider of dental school software in the US and Canada, with huge opportunity to take that know-how and advance it in large group practices and taking the specialty school software abroad. Of course, the importance of connecting software to students in the dental school is clearly an important reason why we invested in this area.

So, Steve and I would be happy to take questions. We want to reiterate our commitment to shareholder value by using our strong cash flow to continue to reinvest in the business, but also more importantly, to repurchase shares of our common stock. During the year, we purchased 1.1 million shares at an average price of $79.50 for a total of $84.2 million. In November last year, our Board of Directors authorized repurchase of an additional $300 million shares, which was on top of the 200 million shares -- $200 million authorized, which was approved in April. So, I think we're using our cash flow wisely. We are, of course, investing in expanding the business both geographically and in terms of product offerings through acquisitions and investments, but also responsibly acquiring shares, so as to reduce our share count.

Steve and I have stated many times in the past, our goal is to spend approximately $200 million to $300 million this year in share buyback, and a similar amount in strategic acquisitions, somewhere between $400 million, $500 million, $600 million in total. This will become clear as opportunities present themselves, but we remain very, very optimistic about the value to our shareholders of investing in strategic acquisitions, while at the same time, of course, growing our internal sales, but at the same time buying shares back as we think this is also a good investment. So, that's a bit on the quarter. Went a little bit over the normal time because covered some of the annual progress in 2012.

So, Steve and I are ready to answer some questions at this point.

(Operator Instructions)

Glen Santangelo, Credit Suisse.

Stan, I just want -- and Steve, I just want to ask a couple quick questions regarding your Q4 equipment sales in North America, obviously very strong, and when I was at the Greater New York Dental Show in December it was pretty clear that your sales guys were marketing very aggressively the sunsetting of Section 179 and beating the medical device tax. And so I'm trying to gauge how much of potential 1Q sales might have been pulled into 4Q, because Steve, if I listen to your prepared remarks, it kind of sounds like you're suggesting 1Q should be the slowest growth year -- the slowest quarter of the year, and 4Q should be the most aggressive if I heard that correctly, because currently the street has it modeled exactly the opposite.

Yes. So Glen, that's why I made the comment because we do expect -- there's a few reasons, one of which you stated on why we do expect Q1 growth to really be the lowest and to accelerate throughout the year. Let me just go through the three or four reasons why we believe that. One, if you look at Q1 last year it was a very strong quarter, so it's a more difficult comparison. Two, we typically make a fair amount of investment spend in new hires beginning at the beginning of the year for activities throughout the year, so they don't start paying dividends until later in the year.

Three is the point you mentioned, Glen. We think we may have cannibalized a little bit of equipment sales in Q1. Also on equipment in Europe, as you know, the IDS show is at the end of Q1 and that typically delays equipment purchases in Europe to after the IDS show. So that will have some negative benefit in Q1 and positive benefit in Q2 and Q3. And so those are the three or four main reasons.

Specifically, with North American Dental Equipment, we just had an outstanding quarter for equipment sales. Yes, we marketed to the tax benefits of buying this year. We do think that helped us. It's really hard to gauge how much it helped us, and again, when I look at the equipment sales growth it was very broad-based, traditional equipment, CAD/CAM, other areas. But certainly, we think we got some benefit because Section 179 was scheduled to expire, so we were advising clients of that.

As it turned out with the new tax law that's passed, it did not expire. In fact, the US government increased Section 179 benefit to $500,000. So there may be some opportunities late in the year in 2013 to talk about that since they increased it. But clearly, we think we got some benefit because of the tax changes that were anticipated at the end of the year.

Thanks for all that. Steve, maybe if I could ask you one follow-up question. Historically we've tended to see some correlation in the direction of equipment sales and consumable sales as traffic sort of ebbs and flows through the dentist's office, and you kind of looked this quarter, and you saw your consumable numbers take another step back and we're kind of back to that growth rate in the 2009, early 2010 time frame. And I'm kind of curious to get your take, Stan, if you guys believe you're truly taking market share, what does that say about the growth rate in consumables? And are you surprised at the magnitude of the disconnect between your equipment sales, your much stronger than expected equipment sales, and potentially maybe slightly weaker than expected consumable numbers?

Glen, it's really hard to pinpoint this thing precisely to basis points. There are a couple of things that we need to also if you want to peel the onion a bit further. The weather was -- played a role in -- certainly in the Northeast on visits. This I think is not only in Dental but I think also in Animal Health. On the Medical side, it shifted the other way because of flu. But I think we had some dislocations because of weather, and also the rhythm of the year end this year was a bit odd, given the time of Christmas and New Year. So you can imagine our Management in the business units has tried to figure this out and spent a lot of time on it. And I think the market is probably a little more robust than these numbers indicate, and so -- but I think we need to wait a little longer. Of course, we lost another day of business in the Northeast because of the snow this week. This week, right?

Yes.

This week. I think the calendar and the weather played somewhat of a difference -- somewhat of a role in making difference here for probably an eight week period of time. But the mood of dentists is not bad. They wouldn't be investing if it were bad. I think some of the 20%-something growth in equipment was the result of people being concerned that the tax laws would change, but you don't only invest in equipment because of that. I think interest rates are low. That's very helpful.

But at the end of the day, I do think dentists are feeling quite good about the profession. The lab business seems to be okay. We've seen worse times in the lab industry. So overall, I think Steven used the word solid. We debated that, whether that was the right word. I'm actually quite sure that that is the right word to describe the state of the US visits to dentists.

Of course, lots of changes, as CAD/CAM picks up so the mix in consumables changes a little bit. Film, by the way, has fallen dramatically in the last year or two with the increase in digital X-rays. So there's a lot going on here. But I think we're in a solid state.

Okay. Thanks for all that color.

Kevin Ellich, Piper Jaffray.

Stanley, just wondering if you could provide a little more color as to what's going on in the international markets. Obviously there's some good explanations of slower purchases ahead of IDS, but what else are you guys seeing in Australia, for example?

Yes, I think, let's deal with Australia to start with. The market is quite solid. I think we had a couple of challenges on the equipment side, but overall, I think the market is quite solid. I think the government is supportive of oral care and I'm quite optimistic about Australia actually for 2013. We just reviewed that particular business a few days ago, actually on Monday with our dental team, and I think we remain optimistic. By the way, the same can be said on the Animal Health side for Australia and for New Zealand.

If you look at Europe, there may be challenges in the UK and in France, but from our point of view we remain quite optimistic. Germany, I think it's -- there's a slight dip compared to perhaps the previous years, but we are expecting at least at this stage a very good IDS. There was some odd anomalies in the Netherlands because of some change in the reimbursement. We think that as the year goes by, that will iron its way out.

I have to say that the two challenges are Spain and Italy, but we are doing very well compared to the rest of the market in Spain and are doing quite well in Italy. But that market is significantly challenged. And just like Spain, we saw a marked decrease a few years ago, so the comparables became easier. I think we start annualizing out in Italy in the next few quarters. So although the market's not booming, I think from a Henry Schein point of view the comps will get easier as the year goes by. So overall, I think the US is stronger, but I think Europe from a Henry Schein point of view should be positive this year.

Got it. That's good color. I appreciate it. Then just a quick one for Steve. I can't remember if you made a comment about this in the prepared remarks, but SG&A was lower than expected. What was behind that? And is 20% a good run rate to use as projection going forward as a percent of revenue?

Well, the operating expenses really benefited from the strong primarily Dental Equipment sales in the US, because a fair amount of our expenses on the Dental Equipment side are relatively fixed. We have a certain amount of service technicians. We have a certain amount of equipment sales in service centers. They don't increase or fluctuate with sales volume. Yes, commissions do but that's probably the only thing that does. So because of the very strong equipment sales growth in Q4, we got greater leverage on operating expense. That's the primary reason.

Our goal again, when you're modeling, is we do expect to get operating margin expansion on an annual basis. Historically, we've talked about 30 to 50 basis points with the lion's share of that coming on the OpEx side. On the other hand, because of -- depending on how sales growth is, it could be on the lower end of that range; it was for most of 2012 because of lower sales growth. But we still expect to get margin expansion on an annual basis, and that's excluding any new acquisitions in the current year, which could increase or decrease margin, depending on the acquired company.

Okay. Thank you.

Michael Cherny, ISI Group.

I just want to dig in a little bit to the competitive dynamics in the medical marketplace. You had some moving pieces from your competitors there. You obviously point to taking share. Can you talk a bit about especially over the next 12, 18, 24 months how you see the competitive dynamics playing out, particularly against the backdrop of healthcare reform and what that means from an overall growth perspective, if you've kind of modeled that already, thinking about it for (inaudible).

Yes, I think it's a very good question. So I think from a broad-based point of view, I think there will be more focus on wellness, prevention, and therefore, visiting the primary care physician. I think that's the case with respect to healthcare reform, which will kick in I think a year or so down the road, but more importantly from insurance carriers, they're encouraging more of that. So that means there will be more visits to primary care physicians, more preventative visits to specialists as opposed to visits to the emergency room, as procedures move out of the emergency room to the office-based environment. So that's one dynamic.

The second dynamic is we see a continued acceleration on the consolidation of practices, small practices becoming big ones, more practices going into IDNs, group practices where there's specialty or multi-specialty emerging, and so the practice is getting bigger. About five years ago we, and for those shareholders who heard this before, forgive me, conducted two independent strategic studies. One is to determine the best practices that we should be supporting from a Henry Schein product sales point of view. So practices such as dermatology and gynecology and aesthetics, and knees, ankles, braces as we call it internally. Those are areas we started focusing on as a result of that study. The second study was to try to understand the way healthcare would be delivered in the years to come. And we clearly understood that the practices would get bigger and this was an area we focused on in the last you few years.

So our Medical Group has done well. Of course, some of the growth has come from products in those areas that we're focused on, but a big part of our growth is -- probably most of it is coming from servicing what we call the upstream part of the market, which is these newer entities, these larger entities, specialities groups, and the IDNs and the large group practices. And we've done well in that area.

So we believe in the strategy. We believe actually we are the best Company to service these needs because we have these very large distribution centers, five of them to service the whole country. They're highly leverageable. The cost in establishing these centers is largely spent. So the more volume you put through these centers, the lower the cost is, the better the operating margin is, and we believe we have tools really that are unique for this marketplace, believe we have better tools than anyone else, and we're very, very excited about our Medical business.

Robert Jones, Goldman Sachs.

Steve, I actually wanted to revisit the SG&A in the quarter. As pointed out, this was the lowest percentage we've even in several years. I was wondering, sounds like equipment played a role there. But I was wondering how much synergies from some of your deals, larger deals you've done over the last couple of years might have played into this, specifically thinking about AUV and the like.

So the acquisitions over the last year or two have helped, although it's not as big an impact as the other item I mentioned, which is the strong sales growth in equipment. And a third thing is we have continued focus on ensuring that we optimize our activities, really everything that we do, we constantly look at how we can be more efficient. But to be fair, the biggest benefit came from the really strong equipment sales growth.

Got it. And then if I could just change gears over to vet, I wanted to get your perspective around the growth outlook. Another strong quarter, particularly in the US. So I guess as you're a little bit of a victim of your own success as we move into 2013, some pretty tough comps. Just how are you guys thinking about the momentum we saw you in '12 as we go into '13 around vet? And does the current demand out there support continued similar growth that we've seen?

Well, we definitely assume or believe that we will see strong growth in our Animal Health business, both in North America and in Europe. But also, we do believe it will moderate somewhat. We can't possibly continue growing at the rates that we're growing, so it will moderate, although we do expect it to be very strong, probably will be strongest growth, continue to be our strongest area of growth.

And remember, there is some impact in the North American Animal Health business because of changes with flea and tick products that have strong growth this year, so that will moderate. So I don't think you can expect the same growth rates. It will come down a little bit, but it's still going to be very, very strong and we're very happy about the potential there.

Just to add a little bit more color to that, and I think Steven set it up correctly. There was some switches between agency and regular GAAP booked sales last year, specifically related to the Novartis FDA challenge. If you peel that out, we grew at something around internal growth, 5%, 6%, probably closer to 6.5% internal growth. There was also a very favorable first quarter because of the weather. So I think this needs to be taken into account.

Having said that, we believe the market is growing in our sector in the mid-single digits and we will continue to gain market share as we have. And remember, our focus is primarily on the companion animal side, and so when comparing us to others you need to take that carefully into account. We believe the market's growing in the mid-single digits. We will gain market share and are very, very pleased with the US Butler Schein Animal Health business, it's doing extremely well both from the market position point of view and a sales and results point of view.

Got it. That's helpful. Thanks.

John Kreger, William Blair.

Steve, could you just remind us what of your entities flow through the equity earnings and affiliate line? It seems like that was a pretty negative swing factor in the quarter year-over-year.

Sure. So, it's actually a little bit of a complex answer. There really are three factors that impacted the quarterly results for the equity and earnings of affiliates. The first is one of the entities we increased our ownership and no longer is reported in that line because it's now a consolidated entity. So comes out of the equity and earnings of affiliate, it's part of consolidated earnings. Second reason is we did have in one of the affiliates, in one of the affiliates we did have some one-time costs that negatively impacted the quarter. And the third reason is because of certain tax changes on a comparable basis versus last year where now some taxes are included in the equity and affiliate line versus prior periods where it was not.

But I think where you're really going, so what can we expect going forward and maybe I should just give some guidance on that. We do expect that the equity and earnings of affiliates in 2013 will probably be in the $8 million to $9 million range. Seasonality, similar to our core business seasonality. So it's going to be a little bit lower than prior years, again, mostly because of the entity that flipped out of that line item and now is a consolidated entity.

Very helpful. Thanks. Maybe just a quick follow-up. How are your dental specialty businesses doing relative to dental overall?

So, dental specialities, they're doing well. Remember, some of those markets, namely implants and orthodontics, are still probably negatively impacted to a greater extent than general dentistry because of economic conditions, especially in Europe. We have somewhere north of $400 million of specialty business on an annual basis.

One of the things that we're trying to do, because it's not just in the CAM log and the Ortho Organizer businesses, there are specialty products in the core businesses. One of the things is we're looking to do is to give a little bit greater visibility on that going forward. But we're definitely gaining market share. I don't have the specific number, John, though, on how much further versus the general dental market.

Great. Thank you.

Jeff Johnson, Robert Baird.

Steve, just a couple clarifying questions all I have left here at this point. Dental Equipment, obviously we don't expect the 22% to continue, and you did talk about maybe pulling some into fourth quarter out of first quarter. We've also heard Dental Equipment backlog's pretty good this quarter, demand there is still pretty decent. So I would assume you still expect some decent growth in the first quarter, even if it's nowhere near that 20% level, is that a fair comment?

That's a very fair comment. Specifically, our North American equipment backlog increased a bit from -- at the end of Q4. So we did see some increase there, but clearly, it's not going to be 21%. It will be lower because we did cannibalize a little bit, we believe. But we're still expecting good growth in Dental Equipment sales in Q1.

Fair enough. Stanley, you brought up the Novartis point, maybe quantified that at 500 to 700 basis points of benefit or so in the year you could back into that anyway. Is there any chance as Novartis comes back online that the exact opposite happens. Where if you guys are growing core 5%, 6%, 7%, but then you have that headwind of going back to an agency business with Novartis that pulls the reported growth rate down to 1% or 2%?

I can't talk about anything specific with regard to a specific supplier. I'm not even sure, I think we may even have a nondisclosure agreement. I don't know. Novartis is committed to coming back, and Novartis I think is committed to working closer with us. So I would be shocked if this would impact our profitability, and of course, as it impacts sales we will discuss any conversion from one methodology of sale recognition to another with shareholders. But I would be shocked if it has an impact on our profitability.

Okay. And last question, I promise here, Steve, just on one more below the line item, net interest and other was up maybe $1 million more than we were thinking and up kind of at levels we haven't seen for a couple years. What was the driver there?

I'm sorry, which line are you referring to?

Net interest and other.

It's a combination of things. The interest expense is down because of lower interest rates and lower borrowing levels. We also -- I think that's the main reason. There may be some miscellaneous other gains, but it's all very small.

Should we expect that $4.5 million to kind of continue going forward after I guess maybe adjust it a little bit for the debt re-fi that will be coming up?

We should expect that the interest expense -- just to give you a little bit of detail. There's a little over $200 million, something like $220 million of debt that we are refinancing. We don't have a specific rate that will be lower, but it could be as much as 2 percentage points lower interest rate, and so that will have a direct benefit starting probably at the end of Q1 when we expect to complete that.

All right. Thanks, guys.

Brandon Couillard, Jefferies.

Steve, just curious if you've got any update on the operating cash flow or free cash flow outlook for next year?

Yes, so as I said in the prepared remarks, our operating cash flow was negatively impacted by about $150 million because of forward inventory buy-ins related to potential price increases for the medical device excise tax. So really, if you look at our cash flow on a normalized basis it would be $150 million higher for 2012. We expect that to reverse in 2013 and get back to normalized operating cash flow, plus this reversal.

And the second thing that I pointed out if you're looking at free cash flow, Brandon, we do expect capital expenditures to bump up a little bit. There is a new building planned in the United Kingdom which is about $15 million. It's not an ongoing CapEx, so we do expect CapEx to be in the $60 million to $65 million range this year versus last year, which it was over, a little over $50 million. So again, we have a little one-time pop in CapEx because of that new building, and then it should resume back to normal CapEx levels going forward.

I appreciate the color on the equity line outlook for the year. Any chance you could give us a range on the minority interest line as well?

I would say minority interest should increase at a slightly faster growth rate than net income growth rates because it does reflect the underlying growth of the businesses that are consolidated, plus the new business that's part of the consolidated entity.

Thank you, sir.

So, thank you, ladies and gentlemen, for your interest. As I've said a couple times during the call today, and I think you can tell from Steven's tone as well, we believe the business is in good shape. We believe that we have a good strategic plan that we're executing well against. Of course, we do have a couple of challenges, namely, the European economy, and we're not 100% certain about the degree of bounceback in the US economy and that's why we want to remain relatively conservative with our guidance, although we are I think enthusiastic internally to continue to make good progress on gaining market share and increasing profitability in all of our business units. So I look forward to speaking to everyone I think in about 60 days, right.

That's right.

Because this is the quarter we report just a little later because it's the year end. And thank you very much. Of course, Steven is available to chat at 631-843-5915. Carolynne at --

631-390-8105.

And Susan at 631-843-56 --

55.

5562. Thank you everyone.

This concludes today's conference call. You may now disconnect.