漢瑞祥 (HSIC) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Henry Schein first quarter conference call.

At this time all participants are in 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 today to discuss Henry Schein's first quarter results.

With me this morning are Stanley Bergman, Chairman of the Board 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 the 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, May 7, 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 said, I would like to turn the call over to Stanley Bergman.

Good morning, and thank you, Carolynne.

Before I begin to discuss the quarter, let me note that just this week, Henry Schein placed number 296 in the 2013 Fortune 500 ranking of America's largest corporations.

Achieving a milestone as significant as being ranked one of the 300 largest companies in America reflects the successful strides our team Schein members have made in growing the Company, specifically over the last 17 years since we went public.

To climb more than 190 spots on the Fortune 500 list in less than a decade is testament to our success in executing on our strategic plan that focuses on our customers' needs by taking advantage of new technologies and tapping into growing markets.

Now, turning to our results for the quarter.

We are very pleased to report positive growth in local currencies in each of our four business groups during the quarter.

The performance was driven by organic growth in North America and of course strategic acquisitions worldwide.

Sales growth was negatively impacted by a number of factors that Steven will discuss in greater detail shortly.

Yet overall, our bottom-line performance was in line with our internal expectations and we are pleased to affirm earnings-per-share guidance for the full year of 2013.

Of course, I'll provide additional commentary after Steven reviews the numbers in greater detail and then of course we'll be open to questions and we'll give appropriate answers.

First, let me ask Steven to give you a review of our quarterly financial results.

Okay, thank you, Stan and good morning to all.

I am also pleased to report overall solid results for the first quarter of 2013.

Before we begin, I'd like to point out that Q1 2013 results include one-time, non-cash expenses related to the refinancing of the Butler Schein Animal Health debt.

This was previously announced during our last quarterly conference call.

I would also note that the first quarter of last year, of 2012, results include restructuring costs of $11.8 million on a pretax basis or $0.09 per diluted share.

Exhibit B of this morning's earnings news release reconciles these one-time, non-GAAP items to GAAP net income and EPS from continuing operations.

With that I'd like to begin by discussing the four factors that affected our sales results for the quarter.

First, our exceptionally strong performance in last year's Q1 2012 made for a difficult comparison in 2013.

Specifically, our Q1 2012 local internal sales growth was exceptional at 7.8% on a worldwide basis and that translated into EPS growth of 19.5%.

Second, in 2013 both the Easter and Passover holidays occurred in the first quarter, whereas last year in 2012 they both fell in the second quarter.

Note that the Easter holiday had a more pronounced effect in certain international markets resulting in one less selling day, because Good Friday is a national holiday with businesses generally closed in Canada and many European countries.

Third, our dental equipment sales growth was negatively impacted in both the US and internationally by two separate factors.

We experienced an acceleration of US dental equipment sales in fourth quarter of 2012 from the first quarter 2013 due primarily to customers taking advantage of Section 179 tax benefits and the possible increased costs impact related to the medical device excise tax.

Internationally the IDS trade show, which occurred in late in first quarter of 2013, resulted in lower European dental equipment sales in the first quarter as practitioners generally delay purchases in anticipation of the show.

Finally in 2013, New Years Day fell on a Tuesday while in 2012 it was a Sunday and this basically means that there are more selling days that were impacted in 2013.

With that as a back drop let me now turn to our financial performance.

Our net sales for the quarter ended March 30, 2013 were $2.3 billion reflecting a 9.3% increase compared with the first quarter of 2012.

This consisted of 9.2% growth in local currencies, a 0.1% gain related to foreign currency.

In local currencies the internally generated sales growth was 3.3% with acquisition growth contributing 5.9%.

You can see the details of our sales growth that is contained in Exhibit A of our earnings news release.

Our operating margin for the quarter, first quarter of 2013 was 6.7% and it declined 22 basis points compared to the first quarter of 2012 and that excludes restructuring costs in the prior year; however if you exclude the current year impact of acquisitions, our Q1 operating margin actually expanded by approximately 10 basis points.

That was driven by operating expenses as a percentage of sales, which improved by 66 basis points as we continued to control and leverage our expense structure.

If you look at the operating expense improvement, it was offset by a decline of gross margin of 88 basis points.

That was due primarily to three factors.

First, we experienced greater internal sales growth in the animal health business, which is lower margin.

Second, we had two animal health acquisitions, C&M Vetlink and AUV Veterinary Services internationally.

That also carried lower gross margins and that accounted for about $77.6 million of sales for the quarter.

Third, we had some sales product mix across all of our business groups.

Our effective tax rate for the quarter was 31.9%, which is in line with our guidance and down from the 32.3% in the first quarter of 2012.

We expect our effective tax rate to remain in the 31% range for the rest of the year.

As we discussed on last quarter's conference call we refinanced the debt related to the Butler Animal Health transaction during Q1.

As part of that refinancing, we incurred a one-time, non-cash charge related to deferred financing costs of $6.2 million on a pretax basis or $0.03 per diluted share, which is net of the non-controlling interest of Butler Animal Health.

Net income attributable to Henry Schein for the first quarter of 2013 was $91.5 million or $1.03 per diluted share; however excluding the expenses related to the debt refinancing, our net income attributable to Henry Schein for the quarter was $94.2 million or $1.06 per diluted share.

This represents an increase of 5.7% and 8.2%, respectively, compared to the first quarter of 2012, excluding restructuring costs.

I'll note that foreign currency exchange did not have any material impact on EPS for the quarter versus last year.

Now I'd like to provide some detail on our sales results for the quarter.

Our global dental sales for the first quarter of 2013 increased by 3% to $1.2 billion.

It was primarily local currency growth of 2.9% and 0.1% gain related to foreign currency exchange.

In local currencies, internally generated sales declined slightly by 0.3% and acquisition growth contributed 3.2% to our sales growth.

If we look at that 0.3% decline in internal growth, in local currencies, it is comprised of 1.1% growth in North America and a decline of 2.4% internationally.

I'll discuss some detail behind each of those figures.

The 1.1% growth in North America included 1.3% growth in sales of dental consumable merchandise and 0.2% growth in dental equipment sales and service revenue.

Our North American dental growth was impacted by the items I said earlier, a tough comparison, timing of certain holidays, and strong dental equipment sales in Q4 of 2012 due to the tax opportunities I also mentioned earlier.

The 2.4% decline in international dental sales included a 1.7% decline in dental consumable merchandise and a 4.3% decline in dental equipment sales and service revenues.

The declines in international dental, both merchandise and equipment, reflect really a cautious spending environment in much of Europe and Australia and one less selling day, which is important to note in many European markets, again due to the Easter holiday.

Also, equipment was negatively impacted by the IDS Trade Show.

If we look at our global animal health sales, they were $639.1 million for the first quarter, which is an increase of 21.6%.

This included 21.7% in local currencies and a 0.1% decline related to foreign currency.

That internally generated sales growth was 6.8% in local currencies and acquisition growth was 14.9%.

When we look at the components of the 6.8% internal growth in local currencies, our North American business grew by 14.9% and we had a small decline of 1.5% internationally.

The growth in our North American business was, again, primarily driven by both market share gains and strong sales in parasiticides.

Our international animal health growth was impacted, again, by the timing of certain holidays, including one less selling day that I mentioned earlier.

We believe we continue to gain market share in this business unit and this marks our fifth consecutive quarter of double digit sales growth in this business.

Our global medical sales were $388.9 million for the first quarter, which is an increase of 9.6%.

This included 9.5% growth in local currencies and again a 0.1% gain in foreign currency.

In local currencies, our internally generated sales was 8.3% and acquisition growth was 1.2%.

The components of that 8.3% internal growth include 9% growth in North America and a decline of 3.3% in international.

We believe we continued to gain market share in the North American segment of this business unit and again that accounts for about 90% of our medical total.

Overall, our medical internal sales growth was the highest that we have experienced in nearly two years, so very strong results there.

Global technology and value-added service sales were $74.7 million in the first quarter, which was an increase of 18.7%.

This included 18.9% growth in local currencies, a 0.2% decline related to foreign currency.

The internally generated sales growth was 11.7% with acquisitions contributing an additional 7.2%.

The components of the 11.7% growth in local currencies were 11.4% growth in North America and 14.3% internationally, with particular strength in both technology and financial services recurring revenue as well as strong overall software sales.

We continue to repurchase common stock in the open market during the first quarter, specifically we repurchased about 840,000 shares during the quarter at an average price of $87.50 per share or approximately $73.5 million of cash.

The impact of this buyback on the first quarter was not material.

At the close of the quarter, we had approximately $227 million authorized for future repurchases of common stock for the balance of the year.

If we take a look at some of the highlights of our balance sheet and cash flow, our operating cash flow for the quarter was negative $38 million.

That compares to negative $48.6 million last year, as typically our first quarter does represent negative cash flow because of certain timing of payments.

We continue to believe that we will have a strong operating cash flow for the year.

Looking at accounts receivable day sales outstanding they were 40.7 days for the quarter, that compares to 40.1 last year.

Inventory turns for 2013's first quarter was 5.6 turns and that compares to 6.2 turns last year.

That's primarily because we continue to work down the inventory forward buy ins that occurred in Q3 and Q4 of 2012.

Also, a few weeks ago we announced a new loan agreement of up to $300 million based on the securitization of our accounts receivable.

It's important to note that this facility represents the permanent financing that we have now put in place for the previously repaid Butler Schein Animal Health debt.

Let me conclude my remarks by reaffirming our 2013 financial guidance as follows.

For 2013 we expect diluted EPS attributable to Henry Schein to be $4.81 to $4.91.

That represents a growth of 8% to 11% compared to 2012 results.

The 2013 guidance does exclude the one-time, non-cash charge related to the deferred financing costs of Butler Schein of $0.03 per share.

As always, our 2013 guidance is for continuing operations as well as completed or previously announced acquisitions but not any potentially new acquisitions.

With that I'd like to now turn the call back over to Stan.

Thank you, Steven.

Henry Schein has a robust global footprint that serves the dental, animal health and medical office practitioners.

Because of our scale and our reach, as well as our strategic opportunistic acquisitions, we are able to post continued gains as measured by a number of financial metrics.

Strong performance amongst certain customer types, geographies and even product lines helps to offset challenges in other parts of our Company.

Our first quarter results serve as a prime example of the value of our diversified business model and related portfolio.

While we have provided detailed insight into sales performance during the first quarter, keep in mind that every quarter has factors that cause growth to fluctuate.

Having said that, the first quarter came in where we expected to perform from an earnings per share perspective and that's from a Company wide overall consolidated perspective.

Let me now provide some specific observations on each of our business units.

On the dental side, last quarter there were two significant dental trade shows that served to affirm what we have been experiencing in terms of dentist sentiment and the demand for various product categories in the United States and Canada and European markets.

The US dental market has been characterized by consistent patient traffic and fairly stable procedure mix.

Our view of the market was echoed at the Chicago Midwinter Meeting in February where there was a particular interest in our cloud based practice management system, Dentrix Ascend, which we unveiled.

The beta version of this new product was introduced actually at the meeting and we began taking some orders.

About a month after the Chicago Midwinter Meeting, the biannual IDS meeting took place in Cologne, Germany over a five day period of time.

IDS is a very large trade show, the largest actually dental trade show in the world, with a strong European representation that is well known as a forum for introducing new products.

Sales are particularly focused, by the way, on the German dentist, the Austrian dentist and some dentists from perhaps the Netherlands and nearby locations, but it's primarily a German marketplace from an order taking point of view.

At the show, we introduced the new easy dental implant by CAMLOG.

The product is now available in Germany.

This is the first implant system designed for easy use with CAD/CAM, in that, scan abutments can be packaged with each case so clinicians have a pre-planned, digital work flow for developing custom abutments.

Of course, there are other systems similar available, but not by one of the larger companies.

In Germany in particular, CAMLOG is in a most leading position in the implant environment.

I think we yet again, for this market, introduce significant change to the dental community.

Overall, we had a successful IDS and are happy with the results of the show.

Yet looking beyond IDS, the European dental market continues to be characterized by stable market conditions in certain countries, specifically Germany, and considerable uncertainty in other countries with Italy leading the pack.

More on that, on the dental market in response to Q&A which investors may have.

Now, let's turn to the global animal health business where we are in the process of rebranding Butler Schein Animal Health to become Henry Schein Animal Health.

This process will take place throughout 2013 and links the branding of our US operations more closely with our market leading animal health business throughout Europe and Australasia.

In fact, we are the only global animal health distribution business in animal health space.

Also, as Steven mentioned, we refinanced the $220 million in debt we took on at the Butler Animal Health joint venture stage, which was formed back in December of 2009.

We have done particularly well in that joint venture and our domestic animal health business is doing very, very well, as we combined three brands to create what is today, in our view, the most successful animal health distribution company in North America, as evidenced by five consecutive quarters of double digit internal growth, specifically related to the companion animal arena and of course continued market share growth as well.

Our international animal health business, bolstered by acquisition growth, continued to gain share with growth in local currency of nearly 29%, but internal growth declined slightly, primarily due to macroeconomic factors as well as one less selling day in most of the countries.

Also, more on that later if people have questions.

Now, let me turn to the global medical group where we are pleased that internal growth in North America represented the highest growth rate in nearly two years as we made further gains in domestic market share where we experienced particularly strong sales growth in the IDN world, integrated delivery network world, urgent care settings and ambulatory surgery centers.

As our up-market strategy, which we began implementing almost a half a dozen years ago continues to gain traction.

What I'm referring to now is our core business.

Let's take a little bit of a look at the impact of influenza this year.

The past influenza season ran long in the US and peaked late and we saw approximately 311,000 doses of influenza vaccine during the first quarter representing sales of about $5.3 million.

We also improved sales of diagnostic and testing products.

Now, let me conclude my overall remarks with a view on our exciting global technology and value-added services groups.

Sales growth was strong both in North America and internationally.

What is of importance here is that this group is making very good strides expanding from our strong footprint here in the United States.

Of course, particular strength in the recurring revenue streams for technology and financial services, based on what was pretty good software unit sales as well.

The business is well positioned strategically to service, in particular in the US, the entry level practice, software practice, the mid range and of course the large enterprise systems including the dental schools.

We are experiencing similar growth patterns in the animal health arena here and are very pleased with our progress on the international side with respect to software and also our nation but growing financial services business abroad.

Before we take questions, I'd like to share two recognitions we recently received.

First, the leading international think tank Ethisphere Institute named Henry Schein to its 2013 World's Most Ethical Companies ranking for exemplary ethical leadership, worldwide business standards, and commitment to corporate social responsibility.

We have now been listed on this ranking for the past two years running.

In addition, Fortune Magazine included Henry Schein in its 2013 list of the World's Most Admired Companies.

We have been on this prestigious list for the 12th consecutive year since we qualified for the Fortune Magazine ranking.

This year we earned first place ranking within our industry in five categories and took second place in the remaining four categories.

So, there's a lot that is happening here at Henry Schein.

I think we've just covered the surface.

We would be happy to provide more information in response to questions.

Operator, we're ready to take those questions.

(Operator Instructions)

Glen Santangelo, Credit Suisse.

Just trying to peel back the onion here a little bit in the Dental business.

Steve, you called out some of the specifics around the equipment shift, the Easter shift, one less selling day.

I'm just curious if you take out all those individual pieces, could you maybe give us your assessment of where you think the dental market is trending?

Both in terms of volumes, as well as I'm sure there was some price inflation that maybe ultimately aided that group?

Stan, if I heard you correctly, I think you were seemingly suggesting that the dentist office traffic is somewhat stable?

I'm really just trying to get a little bit of a better sense of the organic trends pulling out all of the pieces, if possible?

Steven will translate what I'm about to say into math.

Generally, we feel that in North America, in the US in particular, visits to dentists are kind of stable.

We're talking about shifts of basis points, so we may find one month a little bit up, one month a little down.

But, I think we have to be cautious in assessing this year's volume compared to last because the weather last year was exceptionally good and this year we had some regional challenges.

If you take that out, you'd have to make a subjective guess, and from where we're sitting we think that overall, it looks like the market is relatively stable.

Perhaps Steven can translate that into math, because of course we review this quite intensely.

As Stanley said, we did a fair amount of analytics on the impact of those four items I discussed at the beginning of the conference call.

First, let me state there is a little bit of judgment in determining what the impact is.

But we feel very confident that it negatively impacted our sales growth by as much as two percentage points on a worldwide basis, and slightly more than that on a dental basis because we do believe that some of those items are exclusively dental-related, the strong Q4, 22% sales growth in equipment, things like that.

We do believe it was approximately two percentage points to our internal sales growth, Glen.

Okay, thanks.

Maybe if I could just follow up on one question on the Vet business, the Animal Health business.

I think by your own measure you would suggest that the market's probably growing mid single digits, somewhere in the 4% to 5% range.

Yet, Stan, you guys continue to post results that are more than double that market growth.

I think, Steve, if I heard you correctly, I think you seemed to suggest that it was some market share gains and maybe parasiticides, if I heard you correctly?

I'm wondering if you could just elaborate a little bit?

I'm curious were there any mix in the sales going from agency to traditional sales, any one-time things you think are worth calling out?

Or is that a really good organic number for us to be thinking about?

So Glen, first of all, I think we've covered this several times on these calls.

One has to be careful.

We are, with a mix between large animal and companion animal.

Yes, we a little bit are in the Large Animal business, but that's an area we don't really focus on.

So, we're looking at us compared to general data available in the marketplace.

Please remember, we are focused on the companion animal area with some equine in there.

The Large Animal had some changes in distribution over the past year or so as competitors left the market.

So take that into account when comparing us to others, number one.

Number two, there was a significant switch in the agency billing relationship where sales moved from GAAP fully-booked sales -- moved to fully booked sales from agency sales.

If you take that into account, and again, it's very hard to get this perfect, we believe that our normalized growth was about 9%.

We believe the market is growing somewhere around 4% to 5%.

Of course, it's very difficult to get this precise.

But we think we are growing at about two times the market growth and we believe we're really gaining market share very nicely.

Now, I don't believe we are going to necessarily continue to grow internally at 9%, but we believe that the market is growing, 4% to 5%, and we very much believe that we will continue to gain market share.

By the way, I can make that statement on market share growth with respect to all of our businesses, which I think are well positioned to continue to gain market share.

So, I think you have to be a little cautious here.

The data is not very good, but I think that we are growing at about twice the market and feel very comfortable in sustaining well over market share -- growth rates well ahead of the market at least for the foreseeable future.

Okay, thank you.

Robert Jones, Goldman Sachs.

Just wanted to actually dive into the medical business a bit.

The growth there was really much better than we would have thought.

I was hoping you could maybe spend some time discussing what's going on in this segment and in particular North America?

Maybe specifically, on the share gains you saw and whether or not that was related to recent consolidation in that space?

Then, just broadly, if you could maybe characterize the utilization that you're seeing at the physician office level?

That would be helpful.

Sure, so I think you're correctly asking us to focus on the United States, because our International Medical business is not material relative to the size of Henry Schein at all.

Again, this has been covered several times in the conference calls, but I'll do it again because I'm sure there are a lot of new shareholders on this call.

About a half a dozen years ago we undertook a study to try to figure out internally which way the markets would be heading from a Henry Schein point of view with respect to delivery of healthcare.

We actually concluded -- we undertook two studies.

One is the methodology for delivery of healthcare and the second is which areas of the office based practitioner, which specialty areas we should focus in on.

I think the conclusions we reached that paid off very nicely for Henry Schein --

We concluded on the delivery side that the concept of multiple locations under common management, industrialization, if you will, of the office space practitioner would be something that would be accelerating.

Its already started to half a dozen years ago unrelated to the affordable act, but related to the way providers were being reimbursed by insurance companies and the like.

Economies of scale, economies of competency were important already a half dozen years ago.

So, we established a group that focused on what we internally call upstream sales.

These are these larger enterprises, and they are all just a little bit different.

Many are out growths of IDNs, or part of IDNs.

Many are large group practices, multi specialties, single specialty.

Many are spread out over large geographies.

We have established our healthcare services group to focus on sales in this area, and we believe that we have very good tools, both computer systems, systems around the computer with the right kind of management and team members to focus on the needs of these new entities.

We believe that this is growingly being recognized in this marketplace.

As it relates to the competition, quite frankly, we are focused on our Internal business and we are focused on taking market share, and not focused on any one specific distributer.

Having said that, I think we are ideally positioned to handle these larger enterprises.

One should be careful with where the large volume of business is today, which is primarily the smaller practices, and that is migrating to the larger practices.

So, one has to be careful when assessing who the players are as to determining who is better positioned to go after these larger enterprises.

That is number one.

Number two is, and I will go into this more detail if you want, we are focused on certain specialty areas which we believe we are better suited to service, and these specialty areas have characteristics similar to our Dental and Animal Health business.

That's very helpful, Stanley.

I guess on utilization in medical was the other piece of the question.

How would you characterize overall utilization that you're seeing within the physician?

Certainly, the first quarter had significant increase in utilization due to the flu and also due to good weather.

Quite frankly, yes, utilization is important to us but what's more important to us is gaining market share in a rapidly changing market where we believe, really, we have unique supply chain and system capabilities to help these newer entities manage the costs of supplies used by physicians.

We're very excited about this Business.

Of course we are still investing, but investments we've made over the last half of dozen years have paid off very, very handsomely.

That's great.

And, Steven, if I could sneak one in.

You mentioned the tax rate being higher.

Maybe a little bit more specifics on what drove the higher tax rate, and then are we still thinking about 30% to 31% for the full year?

Thanks.

Yes, the tax rate was actually lower than last year.

We are thinking that somewhere plus or minus 31% effective tax rate for the balance of the year is in line.

It's down a little bit on a year-over-year basis, but again that's because of certain tax planning initiatives that were put in place.

Really, not a major change there, but slightly down over prior year.

Got it.

Thanks so much.

Michael Cherny, ISI Group.

I wanted to talk a little bit about M&A.

You had a great contribution this quarter, particularly from the deals you've done in the veterinary side.

Seems like recently some of the more large deals have skewed in that front.

As you think, particularly heading into 2014, I know, Stan, you talked a lot about your growth in specific specialty areas.

Is there any thought to augment your M&A strategy that based on where you see the market going, particularly related to the US driven demand, and trying to help some of your clients as they deal with the new realities in healthcare reform both on the dental and medical side?

Thank you, Michael, it's a good question.

Our pipeline for M&A remains quite full.

Of course, I could have made that statement each year over the last 17 years.

We focused on a careful balance between internal growth and acquisition growth, can't tell you if and when any deals will close.

In all three of our verticals, we are focused on important strategic acquisitions, not necessarily large in size, some are in size, but most importantly, on ways in which we can augment either our geographical presence or our product offering presence.

As it relates to the change in delivery of healthcare, on the dental side I think we have been very well positioned to service the general management, the DMOs, the dental management organizations for, I think we started our group in that area at 17 years or 18 years ago, just before we went public, and, have done very well in servicing these large groups.

There is always competition, of course, but I think our systems with huge investment and our know how in this group is quite extensive.

I don't think any acquisition will impact us there.

As it relates to the medical world, yes, there are ways in which we can expand our footprint.

The investment that we have made in the systems required by these newer enterprises, investment in terms of software and people, is what's going to drive the growth over there.

Of course, there is always opportunity over there to add some more tonnage through our existing structure and that is, of course, pays of in terms of driving more volume through a relatively fixed-cost infrastructure.

But, I think we are well positioned.

We will continue to make additions to add/expand or geography and product offerings as we did in the diagnostic arena in the last couple of years.

Actually, nothing that we need to do to address the needs of the changing delivery network system.

Great.

Just one question on IDS.

You mentioned the impact it had relating to equipment purchasing in the international market in the quarter, obviously a very, very busy show.

Your booth was packed to the gills.

Can you maybe compare the interest you that saw out of IDS on some of your tools, some of the ones from your partners over there versus previous IDS shows?

What that means in terms of how quickly you expect that to convert over to potential orders?

I think we can expect very similar patterns to the patterns we expected two years ago.

Our backlog in Germany is quite reasonable, and we expect to execute on that in the third and fourth quarter.

As related to the competition, gosh, I don't know specifically whether they had good shows or not.

I think we got our fair share of business.

I think our philosophy of focusing on high tech, both in terms of scanners for the x-ray market and in the CAD/CAM area, both in the dentist office and the lab office, is paying off.

I think that IDS helps give us credibility in that area.

The whole area of changes in the dynamics in dentistry through digitalization is a very exciting area.

I think we advanced nicely at the Chicago Midwinter Show, at IDS, expect to gain very nicely in the fall shows in US.

I think that IDS was very helpful to us from a sales point of view and of course from a branding point of view.

Great, thanks.

Steven Valiquette, UBS.

In Dental you mentioned you did a lot of careful studying of those various factors that impacted the results.

I don't want to get too granular in all that stuff.

I really, I'm just trying to figure out, if you think about those in terms of size and magnitude of the impact, which single factor had the biggest revenue in earnings impact on the overall income statement in the quarter?

This is again on dental, in particular.

I'm guessing it was the IDS timing, but if it was one of the other factors, like either the pull forward of sales into the fourth quarter or the timing of the holidays, I'd be curious to hear that?

If there's one that stood out as the biggest impact, I would be curious to hear more about that?

Thanks.

You have to break it down into equipment, consumables and geography.

I think you've pointed the impacts correctly.

If you take Equipments in North America, we had a 22% growth, internal growth in the fourth quarter of last year.

We cautioned everybody on our call, 22% growth in Equipment in North America it's just not sustainable.

It was obvious that we pulled sales from the first quarter, maybe even from the second quarter, into the fourth quarter, primarily related to the two tax issues that people thought would change.

I will say that low-cost financing, not that we have anything special, but the interest rates are pretty low right now, is good for the Equipment environment in general.

I would that in the North America side, the Equipment change was significant.

Also, on the consumables side in North America, the weather was very good and the Easter days are something that needs to be taken into account; that's important.

As it relates to Europe, I would have to say IDS had the biggest impact on German equipment sales, but also would have to point out to the fact that the economy in Italy, we pointed this out last call, is deteriorating.

We did experience some deterioration in a couple of other markets in Europe, a little bit in Australia.

Overall, those are the big trends I would say.

Okay, but it sounds like, just given the size of North American dental versus international then maybe that pull forward is maybe one of the bigger, if not the biggest factor on the equipment it sounds like?

I would say yes, it had to.

I mean there is, I think everyone knows the dental markets for equipment in North America is growing somewhere in the single digits, high single digits, mid single digits, depending on which part of the market you are in.

So, 22% growth, three and one-half times or three times the market growth, is not something sustainable.

Are you going to stick with your policy of not really commenting on the current quarter for any improvement, now that we are mid May?

I would leave that up to Steven who is the best at commenting.

So, I don't want to give specifics.

We do have an overall stronger equipment backlog on the world-wide basis.

That really lends itself to the IDS comments.

It really is weighted towards International.

We do think, just on your earlier question, Steve, on the consumables, the biggest factor was the timing of holidays.

Easter, Passover, Good Friday, all of those holidays negatively impacted Q1, and for the most part reversed in Q2.

I just need to point out, because if you look at all of our business units, Dental, Medical and Animal Health, all had slight declines in the International markets.

There are certain macro economic factors in Europe that are continuing to have an impact on our markets.

We think we are doing better than the market, but it really means doing better is down less than what the markets are on an average basis.

Okay, got it.

That's good color.

Thanks.

Jon Blanc, Stifel Nicolaus

Maybe just the first one on dental market share, and if I could push you a little bit there, I think you alluded that you believe you continue to take share here in the US.

We've some work with shows that regionals or locals might be a little bit more sticky in terms of share than they have been in the past.

Stanley, maybe you can talk to how the environment was when you and Patterson were 50% of the market versus 60% or 70% today?

The share that you are taking, is it easier, is it more difficult?

What resides with the local guys, is that more loyal as we are in a price sensitive environment?

Thank you.

I think the local players, generally, there is one or two that are particularly strong.

If you ex those out, I think they are, in fact, losing market share as a group.

It's very difficult to comment on a specific quarter, and I think one should be very careful with that.

Overall, the big movements in the market on the equipment side relate to technology.

I think the smaller companies just don't have the breadth of technological products, whether it's software, whether it's CAD/CAM, sensors, the 3D opportunities, and more importantly connecting them all together.

I think they have a challenge.

I'm not going to say that they cannot service individual products and undercut us on price, but I don't think price has ever been the big issue in the US dental markets.

We keep a very careful eye on those dentists that view price as important.

Periodically there are items, such as gloves, the glove category is going through some price compression now.

We have promotions in certain markets in the different brands to compete in that area.

I would not say that that's really the biggest challenge.

I don't think the smaller distributers really have an opportunity to compete effectively in the technological race.

That is going to become even more important as we move from manual impressions to fully digitalized chair side or laboratory impressions, the whole prosthetic's arena, tying into implants.

I just don't think that that's going to be where the race is going to be won.

I think that the luster of the smaller distributors as a group has been tarnished over the last decade or so.

Perfect, very helpful.

A follow up, if you could just talk to the North American consumable number of, I think you said, Steve, 1.3% was very similar to the 0.9% in the fourth quarter.

I know there is a bunch of moving parts, but didn't you tack on another 1% or 2% on price from the med device tax?

When you talk to a stable environment, is it just you got to factor that in but then also take out one to two less selling days?

Can you clarify that?

Lastly, just on the cash flow, it looks like stock comp came down for the second consecutive quarter, so is that just at a lower run rate when we look forward?

Thanks, guys.

On your first question, the patient traffic and the comment on a stable US dental market is really after you exclude the less selling days and the timing of the holidays.

Because, obviously, if you have less selling days that's going to impact, but when you normalize for that we think the market is stable.

Again, if as much as two percentage points growth was impacted by these timing differences, it really shows, I think, that those price increases related to medical device excise tax are for the most part being passed through by all of the players.

With respect to stock comp, yes, stock comp was down a bit the last couple of quarters.

There is a little bit of ebbs and flows there because the way our comp program works it's based on financial results.

If financial results come in higher, the comp goes up a little bit.

If they come in lower, it goes down a little bit.

I do think it's really going to be at these similar levels going forward.

Maybe it will tick up a little bit during the year.

Thank you.

Jeff Johnson, Robert Baird.

Steve, I was wondering if I could follow up on your last answer there, just on the pricing side.

There's been a little confusion out there, I think, over the last few weeks since you guys did some marketing meetings, on whether or not price increase is being passed through from the manufacturers are sticking.

Everything I've heard is that they have been, but I think some investors may have heard that they weren't sticking.

Just want to make sure we are on the same page here, that for the most part, I think you said, those price increased are sticking?

Would you quantify them as you roll everything together around 100 basis points positive or so?

How would you think about that?

First, let me just provide a little detail because price increases that we get from our suppliers, there is no separate price increase for medical device excise tax.

If a manufacturer increases their prices 3%, you don't know how much of it is normal price increases for raw materials and other reasons or medical device excise tax.

The analysis that we did at the end of the year and beginning of Q1 was that the price increases on average were greater than prior years and were more broad base.

So, we saw more suppliers having higher price increases than in prior years.

That's why believe that for the most part, and it's a generalization, that those price increases have been sticking.

From our perspective, while we always discount a certain amount off of our published pricing, really there was not any major change in our discount level versus our published pricing.

That's what leads us to believe that the pass through was, generally speaking, a continuing on medical device excise tax

That's helpful.

Thanks for clarifying.

Stanley, I would love to get your opinion.

I know we've discussed this in the past, but you've been selling E4D here for a number of years, you recently added the 3M product and maybe some others down the road on the in office CAD/CAM side.

Just would be interested to hear again, your updated thoughts on where you think that in office CAD/CAM market goes over the next year or two, especially in North America?

Do we see price points come down aggressively?

Do dentists start looking at the lower-priced systems?

Do they stay buying the higher-priced systems?

Is there a pause in the market as they evaluate, just how do you see it playing out?

Yes, Jeff.

What I think you can safely bet on is that the market is going to have a lot of players.

There are three major component parts to CAD/CAM.

One is the scanner, one is the software, and the third one is the middle.

On the software, one of our people counted about 200 systems at IDS.

Obviously, they are not all going to make it.

But there's a lot of new systems, a lot of new scanners that are going to come out.

They will be brought to market in different ways, sold through distribution like us, handed free of charge by laboratories to customers, and included in a full CAD/CAM system, chair-side system that may be sold by one or two, perhaps now three, or four, actually, manufacturers.

There's a lot of changes in that side.

There will be fewer software companies and lots of milling units that will be available in the market place.

How this will all play out, we don't know.

What we do know is the industry is moving rapidly in this direction.

There will be greater use of scanned prosthetic capturing devices leading to significant changes in the laboratory environment where products will be milled digitally rather than only manually.

There will be a lot of activity going on in the office, as well.

At Henry Schein we are committed to what we call an open architecture, so we are committed to working with best in practice in software and hardware.

Our goal is to come up with the best solution, integrated solution for the scanner, the software, and the middle, all tying out to an open architecture with materials and of course implants and related activities that are revolving around the implant from a prosthetic point of view.

Very exciting, we have many, many different initiatives going on in Henry Schein, all related to our global prosthetics initiative.

We believe we'll continue to grow our Business in this area, and a greater amount of our sales will be related to this newer technology on the Dental side and in the Dental Lab arena.

Thank you.

That's helpful, Stanley, thanks.

John Kreger, William Blair.

Stan, are you by chance seeing any signs of increased seasonality of demand in the US Dental market?

We are certainly seeing that in Broader Healthcare.

Curious if you are seeing any of that spill into dental?

When you say seasonal, you mean related to the --?

The resetting of health insurance deductibles, so people tend to go to their providers in the fourth quarter and then not so much in the first quarter?

It's possible that there is some of that.

I've heard a little bit about that from some of the people in organized dentistry.

I don't believe there's any formal data available.

I do believe that some larger companies, and maybe mid-sized companies, changed their whole medical insurance programs to limit any exposure that may kick in in 2014, or allow for greater flexibility, and therefore in that context, may have changed elements of dental.

That may have had some impact on visits to dentists in the fourth quarter versus the first, but there's no hard data that I see.

Great, thanks.

Then just one last one.

Can you give us an update on how your various Specialty businesses are doing in dental compared to the general restorative lines?

Yes.

Of course, the biggest part of our Business is in the Implant arena.

The biggest part of our Implant business is the CAMLOG business in Germany, which did quite well, actually, in the first quarter.

We took market share.

We actually grew quite nicely in that market place.

I would say on the Implant side, a big part of our Business, at least from a sales point of view, is in Europe and Germany, and we did quite well.

I think on the Endodontic side we also are stable to growing, depending on which market.

On the Orthodontics side it's not material to Henry Schein at all.

Great, thank you.

Okay, I'm being told by Carolynne that we should end our call.

Thank you for your interest.

Again, I think you can tell by the tone from Steven and myself that we are quite optimistic about our strategies and the state of the Business.

I think we continue to make progress in each of our three verticals, Dental, Medical, Animal health, as well as in our practice solutions value-added services and financial services group.

I think the strategies are there.

We are making good progress.

I think we have invested very nicely in those businesses, and particularly in management and in the team.

The morale in the Company is very high.

Overall, that is reflective in the good performance.

Steven reiterated, and so did I, guidance for the full year, so at this point in time we still remain quite confident that we will deliver on the guidance range.

The markets are solid, with some challenges in the International arena.

I think we will continue to grow market share even in those markets.

Thank you very much for your interest today.

If you have any further questions, please contact Steven or Carolynne at 631-843-5500.

Carolynne Borders or Steven Paladino, and they can put you through to either one of them.

Thank you very much, and look forward to speaking with you in 90 days.

This concludes today's conference call.

You may now disconnect.