漢瑞祥 (HSIC) 2013 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 Carolyn.

Thank you, Operator, and my thanks to each of you for joining us to discuss Henry Schein's fourth-quarter and full-year 2013 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 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.

These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings.

In addition, all commentary about the markets we serve, including growth rates and market share is based upon the Company's internal analysis and estimates.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast February 11, 2014.

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.

Thank you Carolynne and good morning everyone.

And thank you for joining our call today.

The management team at Henry Schein and the entire organization are very pleased that we completed yet another successful year.

2013 was a year in which we made a lot of progress in all three of our verticals, as well as in the infrastructure and the value-added services components of Henry Schein.

Of course, we ended the year with a strong fourth quarter.

Sales growth during the fourth quarter was solid, on plan; in fact, in a couple of areas, just ahead of plan.

We believe we gained market share in each of our four global business units and we exceeded the top line -- we exceeded the top of our original EPS guidance range.

So I think you will hear from the call good progress in each of our three verticals and our global practice solutions, financial services businesses, and that we exceeded the top line of the EPS guidance range.

We have continued to advance our geographic footprint.

Our product offering has continued to expand over the year through strategic acquisitions, a couple of exclusives that we've added.

Since we reported third-quarter financial results we have announced six transactions in our dental business as well as one in animal health and one in technology and the value-added services side.

These eight acquisitions had total revenues of approximately $317 million on an annual basis.

So we'll report further information, but let me start by asking Steve to review our quarterly financial results and then I will return with some additional comments on each of our business units.

Steve, please?

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

I am also very pleased to report solid results for the fourth quarter of 2013.

Our net sales for the quarter ended December 28, 2013 were $2.5 billion, reflecting a 4.9% increase compared with the fourth quarter of 2012.

This consisted of 4.4% growth in local currencies and 0.5% growth related to foreign currency exchange.

In local currencies, our internally generated sales increased 3.7% and we added an additional 0.7% for acquisition growth.

You can find the details of our sales growth in the Exhibit A to our earnings news release which was issued earlier today.

Our operating margin for the fourth quarter of 2013 was 7.4% and declined slightly by 13 basis points compared with the fourth quarter of 2012.

When excluding the impact of acquisitions completed during the past 12 months and related acquisition expenses, our operating margin declined by about 5 basis points.

Our effective tax rate for the quarter was 29.8% which is down slightly from the 30.6% in the fourth quarter of 2012 and is in line with our guidance.

The lower tax rate is due to the continued implementation of tax planning strategies as well as higher earnings in countries with lower corporate tax rates.

Going forward for 2014, we estimate our effective tax rate will continue to be in the 30% range.

The net income attributable to Henry Schein for the fourth quarter of 2013 was $124.3 million or $1.43 per diluted share.

This represents growth of 10.5% and 13.5%, respectively, compared to the fourth quarter of 2012.

Foreign currency did not have any significant impact on the EPS for the quarter.

Looking at our financial results for the full year, there are a number of highlights to report, all of which are records for us for the year.

Our sales increased 6.9% to $9.6 billion.

Cash flow for the year was $664.2 million and exceeded our adjusted net income by over $230 million.

Our adjusted EPS increased by 11.5% to $4.95.

And I think it's important to note that our EPS for the year was $0.04 above the top of our original guidance range, which was $4.81 to $4.91.

So clearly we believe 2013 was excellent year.

If you look at Exhibit B of today's earnings release, you can see a reconciliation of GAAP to non-GAAP income and EPS from continuing operations.

Let me now provide some detail on our sales results of fourth quarter.

Our global dental sales for the fourth quarter of 2013 increased 3.9% to $1.4 billion representing a gain in market share based on our estimates of market growth rates.

This 3.9% growth consisted of 3.1% growth local currencies and a 0.8% gain related foreign currency exchange.

In local currencies our internally generated sales increased 2.6% and acquisitions contributed an additional 0.5%.

Of this 2.6% internal growth, we had 2.1% growth in North America and 3.5% growth internationally.

If we look at some details of each of North America and international, the 2.1% North American growth included very strong growth of consumable dental sales of 4.3% and a decline of 2.4% of dental equipment sales and service revenue.

Remember, though, that in North America our dental equipment sales growth last year's fourth quarter was 21.9%, and therefore it really created an extremely difficult comparison.

The 3.5% growth internationally included 1.5% growth in dental consumable merchandise sales and a very strong increase in dental equipment sales and service revenues of 8.6%.

This growth was largely driven by the Sirona CEREC sales as well as upgrade promotion, and we are pleased to continue our success with this important supplier in Europe.

Our global animal health sales were $651.7 million in the fourth quarter, an increase of 6.6%.

Foreign exchange did not have any significant impact on the sales growth for the quarter for this business group.

And our internally generated sales contributed 4.8% to our sales growth, an additional 1.8% for acquisitions primarily related to the C&M Vetlink acquisition.

If we look at the 4.8% total internal growth on a global basis, it consisted of 7% growth in North America and 2.9% growth internationally.

If you normalize our results to account for the switch from agency sales in North America, our North American sales growth was approximately 3.8%.

This growth was impacted by lower sales of certain parasiticides largely due to weather-related conditions in the quarter.

We believe we gained market share in both our North American and international Animal Health businesses.

Our global medical sales were $421.9 million for the fourth quarter, which was an increase of 4.8%.

The bulk of that growth was local currency growth of 4.6% and the remaining 0.2% was foreign currency exchange related.

Of that 4.6% local currency growth, it consisted of 5.2% growth in North America and a decline of 6.5% internationally.

If we look at the fourth quarter, we had very strong sales of seasonal influenza vaccines with $23.8 million in sales for the quarter.

And if you normalize and exclude the sales of influenza sales from both the current period and the prior period, our global medical sales growth increased 2.8%, with 2.6% growth in local currencies, and over 3% -- 3.1% growth in North America.

We believe that patient traffic to US physician offices was largely consistent with the third quarter, the prior quarter, and we are confident that our focus on large group practices will allow us to continue to gain market share in the US market.

Our global Technology and Value-Added Services sales were $88.4 million for the quarter, an increase of 8.6%.

And that included 8.9% growth in local currencies and a 0.3% decline in foreign currency exchanges.

In local currencies, the internally generated sales growth was also 8.6% and acquisition growth was 0.3%.

The composition of the 8% growth was 6.7% in North America and a really strong growth internationally of 21.5%.

We are really very pleased with our sales growth in both the Technology and Value-Added Services businesses.

I'd like to point out something that will occur beginning in the first quarter of 2014 related to this category, and that is that the sales of a specific dental software product will be recorded on an agency basis going forward.

These sales were previously recorded as a direct sale.

So the change will lower the sales in the Technology and Value-Added Services businesses by approximately $4 million per quarter, again beginning in Q1 of 2014.

Remember, though, that the profitability of this product line remains unchanged.

It still remains at good profitability, it just is that the sales now are recorded on an agency sales basis.

We will also provide normalized growth figures throughout 2014 to better analyze the growth of this category.

So, related to stock repurchase, we continued to be active in repurchasing our common stock during the fourth quarter.

Specifically we purchased 664,000 shares during the quarter at an average price of $111.04 per share, which translated to approximately $73.8 million.

The impact of the quarter's repurchase really was not material to our EPS for the current quarter.

For the full year, the Company did repurchase a little over $300 million, $300.3 million of stock representing 3.1 million shares at an average price of $97.71 per share.

And this is really in line with our stated goals of purchasing between $200 million to $300 million per year, and obviously at the high end of that goal.

At the close of the fourth-quarter we still had an authorization for future repurchases of common stock of $300 million and we remain committed to our goal of repurchasing between $200 million and $300 million of stock for 2014, barring any unforeseen circumstances.

Let's take a look at some of the highlights of our balance sheet and cash flow for the quarter.

The operating cash flow for the quarter was very strong at $274.6 million compared with $199.7 million in last year's fourth quarter.

The operating cash flow was a record for the year of $664.2 million and our free cash flow was over $600 million for the year.

As I mentioned earlier, we're very pleased to have exceeded our goals related to cash flow and free cash flow.

Accounts receivable days sales outstanding was 39 days for the fourth quarter, which is essentially unchanged from the 38.9 days in the fourth quarter of last year.

And on a full-year basis, it was relatively consistent also.

Days sales outstanding for the full year were 40 days this year compared to 39.8 days last year.

Inventory turns also were consistent quarter over quarter, fourth-quarter being 6.2 turns compared with 6.1 turns in the fourth quarter of 2012.

And also for the year they were approximately 5.9 turns compared to 6.2 turns last year.

So I'd like to conclude my remarks by affirming our 2004 (sic) financial guidance as follows.

For 2014 we expect diluted EPS attributable to Henry Schein to be $5.29 to $5.39, which represents growth of 7% to 9% compared with the 2013 results, which exclude certain one-time items that are noted in our press release.

It's important to note that we expect the growth in EPS for 2014 to accelerate over the course of the year, to really -- to a number of factors, including the timing impact of recent acquisitions.

And that's primarily related to BioHorizons.

And just remember that the inventory revaluation associated with the BioHorizons acquisition will have a negative impact primarily on the first quarter of 2014.

This inventory step up is a non-cash expense and is directly related to acquisition accounting for this business.

Finally, of course, our 2014 guidance is for current continuing operations as well as all of the previously announced and completed acquisitions, but does not include any potential future acquisitions.

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

Thank you, Steven.

Let me take a few minutes to provide additional detail on each of our business units.

So, on the global dental business, gains in North America dental sales included solid growth in the consumable merchandise category while equipment sales and service revenue declined slightly following growth of nearly 22% in the prior-year quarter in 2012 versus 2013, which of course made for a very challenging comparison.

But if you average those out, it's still about a 10% increase in sales each year, which we believe is in excess of the market growth.

And therefore, very pleased with the fact that we continue to gain quite a bit of market share on the dental equipment side here in North America.

Of course we are very pleased to report that international dental sales returned to growth during the quarter on consumables, which is a good sign that the European dental market has stabilized.

And we posted very good gains on the equipment side -- equipment sales and service revenue growth on the international side of the business, dental side of the business as well.

With a strong focus on delivering value particular through equipment and software solutions, we are proud to partner with key multinational dental companies specifically on the equipment side: Sirona, Planmeca, Danaher.

We believe we have the best selection of products in the world, best offering of products combined with solutions.

Henry Schein acts as Sirona's largest distributor of CEREC and CAD/CAM systems in Europe.

And now through our relationship with Planmeca, we offer a broad range of dental imaging equipment and related software.

And of course, for a decade we have partnered with Danaher to deliver dental consumables and innovative solutions that are accelerating the adoption of digital technology in the dental office including, of course, state-of-the-art 2-D and 3-D imaging.

So, together with these manufacturers and a number of other equipment manufacturers and supplier partners, we really believe that we continue to be in the best position to help dental practitioners elevate the quality of the patient care they are delivering, utilizing this new technology, and so, of course, improve the long-term success of their businesses.

This combination of providing, and generally in an open architecture way, the best offering of equipment, value-added services and particular software we believe will continue to allow our practitioners to operate a better business so that they can provide better clinical care.

And in the long run a lot of the new technology is going to give Henry Schein a terrific sales runway in the years to come.

As I mentioned at the start of this call, we have announced a number of strategic transactions this past year.

At the end of 2013 we acquired approximately a 60% interest in BioHorizons, which expanded our position in the dental specialty market.

This was a strategy that we've been marching to for several years now.

BioHorizons is a US-based manufacturer of advanced dental implants.

Their products are sold in 85 markets around the world.

The Company had annual revenues of approximately $115 million, with about half of that coming from the US.

So if you look at our position today in implants, you will see we made terrific progress in the last few years.

This agreement with BioHorizons strengthens our position in a critical and growing market, and also includes our investment in CAMLOG, which is of course a leading manufacturer of dental implants in Europe.

We're quite pleased actually to announce and report to our shareholders today that [amended] January we acquired the remaining minority interest and now own 100% of CAMLOG.

With the BioHorizons and CAMLOG investments, we have made important strides in our implant business, and in particular in two of the world's largest implant markets, namely the US and Germany.

In that you could, of course, add Canada and a number of other European markets and Japan.

And we were comfortable that we continue to grow our presence in a very profitable way in the dental oral surgery markets with a focus on the key product offering of implants.

Both BioHorizons and CAMLOG will operate independently and will leverage strong brands and unique product features and benefits while offering customers a broad range of treatment options.

Also of note, BioHorizons strengthens our product portfolio in the biologics market which is critical to our goals and advancing our position in the oral surgery field.

Of course we carry many brands in that space and are continuously working to expand our footprint in the biologics with world brand leaders, and very, very important for us.

The advancing in the BioHorizons area, the whole implant area, oral surgery area is complemented by the announcement we made in the first days of January when we announced another important strategic transaction whereby we acquired five dental businesses from the Dutch company Arseus.

These businesses strengthen our European dental and technology operations.

Each one of these five businesses has a critical strategic -- pulls out of critical strategic piece of our puzzle, and includes a French dental practice management software, Julie, making us, I believe now, the largest provider of dental software in France, as well as four key distributors serving dentists, dental laboratories, dental universities in France, the Netherlands and Belgium.

The total annual sales acquired -- of these companies acquired amounted to $97 billion on a historical basis.

These transactions have now all closed.

Julie was closed at the end of last year and the others were closed recently in the last few weeks.

These, our sales businesses, operate in attractive markets with good growth prospects and have achieved strong market positions and excellent brand value.

These acquisitions represent a strategic French dental dealership adding two important product offerings in France.

The software company, as Julie, will strengthen our lab presence in three very important markets: France, the Netherlands and Belgium.

Each acquired company also has an excellent business and cultural fit with Henry Schein.

We know many of the leaders, managers these companies and we expect a terrific and smooth integration with our management team and our culture.

We look forward to leveraging our global best practices in these businesses, but also acquiring some excellent talent.

Of course this will add to our already very strong position in the European markets.

In February we announced the acquisition of Lincoln Dental supply.

Lincoln sells products and equipment primarily to dental labs in the United States and Canada.

They distribute branded products as well as private-label products; had sales about $18 million last year.

The transaction, of course, is an excellent commercial fit with our Zahn Dental laboratory business and strengthens our presence in the important laboratory market, particularly in northeast of the United States.

So, if you take Lincoln and Arseus, you will see that we have strengthened our global lab footprint.

You add BioHorizons to that, you will see we have cumulative strength that we added in the whole prosthetics field in general.

And so, overall, with our software investment in Julie, we have advanced all three component parts that are articulated so carefully in our strategic plan.

So, overall, I must say we're very pleased with our global dental business, which is by far the largest dental business in the world.

We've made terrific progress on the management side there.

Jim Breslawski continues to lead that business; experienced dental senior executive.

And I must say overall that we are very, very pleased with the progress we've made on the dental side together with our investments in all the specialty businesses in general on the dental side.

Let's spend a few minutes on our global animal health business.

This business once again performed very well during the fourth quarter.

North American internal sales growth in the high single digits is consistent with our stated goals, and international animal health internal sales growth in local currencies accelerated slightly versus the prior quarter.

In addition to the strategic dental transactions I just described, we also announced a very important strategic animal health acquisition in the fourth quarter.

In mid-November we announced we had entered into a definitive agreement to buy 80% of Medivet, which is a leading distributor of animal health products and services in Poland; in fact, we believe the largest and in a very important market, Poland.

We expect this transaction to close later in the year.

Medivet marks our entry into the Polish animal health market and we really are delighted to do so in a leadership position.

Our animal health business now has operations in 12 European countries and Medivet will provide strategic base, a very important strategic base for our expansion into Eastern Europe.

I just met with a number of very important global suppliers of animal health products.

And I think our desire and our execution on our plan to continue to become an even more important global animal health distributor is being well received by those manufacturers that we work with closely.

So I'm very, very pleased to report again, very good progress.

Lonnie and her team on the animal health side are doing a great job.

So now let's turn to the medical business.

We reported good growth during the quarter, benefited of course by the strong sales of seasonal flu -- influenza versus the prior year, so good growth versus the prior year.

While growth excluding the impact of the flu slightly accelerated compared to the third quarter, we feel that the strength of this business unit will be felt even more in the years to come.

We believe that traffic in the US physician market is largely consistent with prior quarters.

But we're really confident that the investment we've made in this area is, specifically around the large group practice arena, the multiple locations under common management type networks that are now growing and flourishing in this market, these are all areas that we have invested in.

And we believe our investment is going to pay off very, very well for our shareholders.

Of course, Dave McKinley and his team continue to do a great job as a thought leader and a provider of solutions to this rapidly-changing market.

The dynamics are changing rapidly and we believe that we are well-positioned to help our customers deal with the new challenges and exciting opportunities of healthcare reform.

So, the fourth of our business units as of course our global Technology and Value-Added Services business.

Growth in this unit was driven by, as we've reported in the past, electronic services -- the recurring revenue; of course software sales.

And the big thing is value-added services that this unit provides to our installed base.

I might add that sales in the international markets were particularly strong, and we're excited in particular to add the Julie acquisition.

That footprint will, of course, add strength in an important market and we will continue to expand our global footprint in the software arena.

I think we've disclosed this: Julie adds about 8000 installed systems in France.

In France we have a very strong position on consumables, equipment and now we will have the software to complement that.

We're very pleased with the performance on our practice solutions side; Jim Harding, Steve Klis and the team, Kevin Bunker.

This is a world-class team doing extremely good work servicing our customers across the board, and we have great confidence in the strategic importance of this business.

And we'll continue to invest heavily in this area.

So this is the call that relates to our year-end conference call.

Let me reflect back a moment to a few of the highlights in 2013.

Of course we are pleased that we have met or exceeded many significant goals for the year.

I think all of the key goals, really, by and large we've done well on.

We've exceeded our strategic expectations, largely, on balance.

The strategic plan goals we set for ourselves three years ago have been advanced in a terrific way.

Of course if you look at the short-term matters of guidance for the year 2013, which we announced I believe in the fourth quarter 2012, we exceeded that -- the top of the guidance by $0.04.

We completed ten strategic acquisitions.

About $300 million of businesses added.

We did very well on the cash flow side.

I believe we generated about 1.5 times our earnings in cash, so we turned our earnings into cash plus we reduced our working capital and other ways in which we generated cash.

So overall, the cash aspect of the business is doing very well.

And at the same time we acquired $300 million of stock, all in line with our goals.

Henry Schein's commitment to our customers and the communities that we serve was evident practically every day of the business in 2013.

Most notably was our support of the suppliers and financial aid after the several horrific events including Sandy -- American Sandy on the US East Coast, the devastating tornadoes in Oklahoma, the typhoon in the Philippines; our commitment to various community outreach programs such as Give Kids a Smile.

The ADA's leading -- the American Dental Association's leading outreach program, our back-to-school program.

All of this, I think, fuels our commitments to advancing shareholder value, advancing what's the interest of our team, our suppliers, our customers and our investors, leading to a very good solid return to our investors now over the past 18 years that we've been a public company.

If you look at just the leading indexes, we were delighted to enter the top 300 Fortune 500 rankings of the largest US corporations, now ranked number 296 on the 2013 list based on 2012 numbers.

So with that as an overview, we feel quite pleased with the progress we made in 2013, excited to go into 2014 with high morale in the Company, solid management team and generally a business that has a strategic purpose and executing on that purpose.

So with that in mind, Steven, why don't we -- Carolynne, why don't we open the line to some questions?

(Operator Instructions) John Kreger, William Blair.

The North American dental and consumable growth, I think you said 4.3% was very impressive.

Do you think you can hold that sort of level as you progress through 2014?

You know, I think that we feel that we'll be in that range.

I hate to be so specific and say 4.3%, because if it comes in slightly greater, slightly less.

I think we'll be in that range.

We did feel that Q4 was exceptionally strong.

We did execute really well.

We do believe that we'll see a little bit of improvement from the market maybe at the tail end of the year.

So I guess our goal really is to be consistent in that fact, but I just caution people not to really look at it so precisely by every 10 basis points.

Great, thanks.

Maybe just a quick follow-up.

It seemed like you European results for both vet and dental were pretty good, at least relative to what we expected.

Do you feel like you're starting to see a turn in those end markets?

John, I think there's a general sense.

Of course this is a sense; it's not scientific.

Europe is stabilizing -- no one is saying that we are returning to boom times?

But even, I think, in southern Europe, two markets that we are in, Spain and Italy, there is a quiet confidence that we are going to get to stable consumable growth and even investment in equipment.

So I think that's a little bit of the canary in the cage that I think is indicative of the fact that there is a sense that things are getting a little bit better or stabilizing to better in Europe.

Excellent, thank you.

Jeff Johnson, Robert Baird.

Stan, I thought I would start with you just on the CAD/CAM business.

Planmeca has moved pretty quickly here to rebrand NEVO and change out some software and all that.

Can you talk maybe about the opportunity you think that creates for 2014?

And then also, I know you've had some supply constraints on the NEVO system on the manufacturing side here in November, December, whenever that was.

Do you have a backlog of orders going into 2014?

How is that looking as we go into the New Year?

So, our number one strategy for dental right now and I expect for many years to come is to continue with advancing our customers' digitalization of their practices in the case of the dentist, and in the case of the lab, the automation of the digitalization of the lab.

There's no question that there's a huge opportunity on the hardware side, be it the scanners or the [mills] on the software side.

There's lots and lots of opportunity there, both in the laboratory -- both in the operatory and the laboratory.

And also some exciting materials I think are going to emerge over the years to come.

So this is very, very important for Henry Schein.

To the extent practical, we will support an open architecture because that's in the interest of the dental community.

It will take a while, I think, for the marketplace to adjust, as it has in many -- in most other areas of dentistry to open architecture.

All of our software, by the way, today supports even our competitors' software interchanges.

So I think that's in the best interest of the practitioner.

So I think it was important for E4D to add a leading brand to its name.

And in that context in the US, Australia, and Canada, New Zealand, we will be marketing the Planmeca line.

Other markets we'll market Sirona and I expect that are other manufacturers will all be coming out with some form of hardware, software.

We do sell the 3M scanner in a number of markets plus a number of other markets.

So we're very excited.

We're very pleased with the speed that Planmeca went about converting the E4D name to the PlanScan name.

And I think overall we are happy with our offering of CAD/CAM and related software and hardware.

And the key now is for Henry Schein to differentiate the offering that we make available to our customers.

And I think you'll see advances in -- connected to dental and other areas like that, that will differentiate Henry Schein's offering as we have done for years.

CAD/CAM and practice management software will connect.

We will continue to invest -- our investment in school and large group practice software over the years.

We'll tie into CAD/CAM as well.

So, overall the strategies here have been laid, they'll be adjusted and we will execute to them.

As for the backlog, yes, in NEVO, we sold quite a few more NEVO systems or CAD/CAM systems with NEVO front in the fourth quarter than E4D had the capacity to deliver.

I believe that with Planmeca being part of the management team now, or supporting the management team with E4D, the capacity will increase.

We do have solid sales in that area and I think our overall global CAD/CAM business will continue to grow, with our goal to be the leader in that field.

Fair enough, thanks.

That's very helpful.

And Steve, on my follow-up question, I just wanted to focus on your international technology business, up 21.5% in the quarter, a very strong number there.

Can that persist into 2014, or maybe not at that level but solid growth there?

And maybe any color -- is that some of the recent software deals you've done over the last couple of years?

And I guess the last follow-up on that question, just where have margins -- where do you expect margins to go in the technology business over the next year or two?

They been trending down with some deals but seem like they're reaching a point of stability.

Is that true going forward?

Okay, so there's a few questions there.

So, one, the 21% growth I think it's a little unrealistic to expect us to continue at 21% growth international software.

I do think that high single, low double digits is doable for that business unit.

They just had a blowout fourth-quarter.

It was primarily in the software of excellence business that we acquired a few years ago.

With respect to margins, I think yes, margins probably will be consistent going forward, maybe with a little bit of improvement as we continue to grow sales and drive business towards e-services, which tend to have a little higher margin than the overall software sales.

Thank you.

Jon Block, Stifel.

Thanks and good morning.

Maybe if I could just ask a question on weather, and you guys don't usually make excuses.

But maybe, Stan, if you can talk about the weather and any impact you've seen in the first six weeks of 2014.

And then I'm just curious if you're seeing it more pronounced in any of your businesses.

In other words, is it more pronounced in vet relative to dental or medical?

Thanks.

That's a good question.

I actually was hoping somebody would ask that question because I think it is a relevant question.

We, of course, have been experiencing inordinate difficulty because of the weather in a large part of the US.

I think this is the first time cities like Atlanta have had a challenge because of winter weather.

I think this will have an impact on some of our sales in the first quarter.

We will, during our first quarter, call try to identify that impact.

I think there will be a few less visits to dentists, probably to animal health practitioners, perhaps the some of the dermatology type physician practices.

But I don't think it will have a material impact on our bottom line.

Of course it will have somewhat of an impact, but we remain comfortable with the guidance for 2014 that we provided.

I think our guidance always contemplates something like this occurring somewhere in the world, and it is just a little bit more intense this time in the US.

But overall, we still feel quite comfortable about 2014 guidance.

Okay great.

And then maybe as a follow-up, just on the -- and Steve, this is more for you on the gross margin expansion.

It was up year-over-year and I think it's really maybe for only the second time several years you've seen that.

I'm guessing some of that is attributable to lapping the lower margin vet acquisitions of the past.

Just how should we think about this going forward?

I mean, are you in the clear and able to get maybe some gross margin expansion as we look out for the balance of 2014 and into 2015?

Thanks.

Sure, Jon.

The gross margin really is primarily related to mix.

So we talked about technology sales growth being stronger, and that helps drive the gross margin.

But really I think we focus more on the operating margin and we've talked about even as recently as our investor day.

We still believe that we can get operating margin expansion.

The way we measure it is on what I refer to as a same-store basis, so excluding any new acquisitions, which could be accretive or dilutive to margins.

And the goal really there is to get margin expansion of at least 20 basis points on a full-year basis.

We do believe that going longer-term that there's potential for that 20 basis points to expand a bit as sales growth increases, as market conditions improve a little bit.

But right now somewhere in that 20 basis points is a goal that we think is doable and achievable.

Great, thank you.

Glen Santangelo, Credit Suisse.

Steve, I just wanted to follow up with you on that last point you were just making on your organic operating margins.

I think in your prepared remarks you suggested that your operating margin on an organic basis maybe contracted 5 basis points.

I'm just kind of curious.

Is that solely related to the acquisitions or is there something else going on there?

And then I guess the question is, at the current revenue run rates, do you think you can achieve that 20 basis points of operating margin expansion?

Or do you need revenue growth to accelerate a little bit?

Again, so the 20 basis points at current revenue growth rates we think is doable.

That's with what our plan is calling for, for 2014.

The interesting thing is that, yes, while for the quarter it was down a little bit, 5 basis points, and that 5 excludes acquisition impact.

But on a full-year basis, it was actually up slightly excluding acquisitions.

It wasn't quite the 20 basis points.

It was high single basis points.

It was 7 or 8 basis points improvement for the full year.

You know, one thing I'll point out that impacted Q4 is if you looked at all the acquisition activity that we announced in early Q1, a lot of expenses hit in Q4 to drive that acquisition expense -- to drive those acquisition activities in Q1.

So we record the diligence cost of professional fees, all of those acquisition costs as incurred.

So they're always incurred prior to the acquisition being completed.

So we were a little bit heavy in Q4 on those expenses because we did have a lot of activity that was announced in early Q1.

The interesting thing also is that when you look at Q4 there was a lot of mix impact.

Because when I look at the individual businesses, dental, medical, animal health and technology, and this may sound like a contradiction but it's not.

Each of them had margin expansion Q4; each of them.

Yet because of mix, it was down 5 basis points.

So I guess the short answer, to conclude, is that we do believe that we can get operating margin expansion in 2014 and that's what our internal plans call for.

Steve, maybe if I could ask a follow-up question on some of these recent acquisitions.

It seems like you obviously trimmed your fiscal 2014 guidance a little bit a few weeks ago when you announced these deals.

And I'm just kind of curious; what is driving that near-term dilution?

Is it mostly the amortization related to these acquisitions?

If we were to look at it ex the amortization would these deals be accretive in year one?

Or is there something -- is there a new trend with respect to -- are we seeing any inflation in the purchase prices for these assets?

If you can just give us a little bit more color, it would be helpful.

Clearly if we excluded amortization they would all be immediately accretive on what people sometimes call a cash basis.

What really happened is, on a couple of the acquisitions, and most notably on BioHorizons, we kind of had a double negative impact.

Because BioHorizons is a manufacturer, the amortization is higher than most distributors' amortization.

And because it is also a manufacturer, the accounting requires us to step up the inventory.

So, really, to try to quickly describe what that means is that effectively we have to value the inventory on the date of acquisition at fair value less disposable -- disposal costs.

So that fair value really reduces our profitability and we don't get our normal gross profit on that.

So that's really negatively impacting the first year's accretion.

We did say on the BioHorizons acquisition if you just exclude the step up in inventory, which is a total non-cash charge, that deal would be neutral to EPS for the first year.

And then obviously if you also exclude out amortization, it would be accretive.

So I think BioHorizons, because it's a manufacturer we are typically buying distributors, really is little bit unique and caused a little bit more GAAP dilution than typical.

But you know we still feel like they are good strategic acquisitions.

We still feel like we'll see accretion going forward.

And strategically, as I think everyone knows, implants and dental specialties is very important to us.

And we feel like we -- it's the right thing for us to do.

Okay, thanks a lot.

Brandon Couillard, Jefferies.

Steve, the cash flow was exceptionally strong in 2014.

Should we anticipate a similar experience next year?

And was there any stepped up inventory buying in front of the end of the year in the fourth quarter?

Okay, so we did have the reversal in 2013 of the increased inventory purchases that, at the end of 2012, related to medical device excise tax.

So I think if you looked at that, that's probably somewhere around $150 million worth of benefit.

So I would say that we are not going to see the same -- it will be a little bit below cash flow in 2014 versus 2013 because of the that benefit we got in 2013.

And remember that's a timing issue between 2012 and 2013.

With respect to end of year [volumes] for the current year, we always do a certain amount of [buy-ins].

But I would not say we had any unusual activity this year that we would need to call out separately going into next year.

So we still think will get strong cash flow, certainly operating cash flow well in excess of our net income, which is our goal.

But it will be a little bit down because of that one-time medical device excise tax benefit.

Thanks, and Stanley, if you could just take a minute and elaborate on the growth rates you are seeing in implant market in Germany.

I know Straumann recently came in with a price cut to at least one of its lines.

How would you characterize the competitive environment?

And then just the aggregate market growth rate of the implant market in Germany, that would be helpful.

I can't give you the exact expectation of the growth market in Germany per se.

But I do think the market will move back into positive growth.

And I don't want to comment on anyone's reduction in prices.

I will tell you that we believe that CAMLOG continues to gain market share in Germany.

We believe this is particularly so because of the introduction of the eZ implant system.

We believe we have been taking share on the premium side.

By the way, we plan on rolling out eZ throughout Europe.

So I do believe the market in Germany will return.

Can't tell you exactly which quarter to an environment of positive growth units.

And we remain quite excited about expanding our presence in Germany, not only in the implant itself but in general to -- sales to oral surgeons.

Steven can make some specific inquiry from our German sales team and can give you some more information.

But I just participated in a CAMLOG meeting about two weeks ago and our team is feeling pretty good about our position in the German market.

Super, thank you.

Robert Jones, Goldman Sachs.

Hi, this is Nathan Rich on for Robert.

My first question is, if we look at the performance in dental equipment on the international side this quarter, can you help us contextualize this?

I think you said that performance was helped by some upgrade promos you did around Sirono's CEREC system.

-- Sirona's.

How big of an impact did that have in the quarter?

And how should we think about the run rate for international equipment growth going forward?

Well, we had -- I would say that certainly the upgrade promotion helped drive very strong growth.

And that won't continue all the year long, but we'll still get upgrades in Q1 and beyond.

I think even when you -- and I don't even really want to get into that level of detail.

But our growth, even excluding the upgrades, was also very strong.

And so we feel good that, as Stanley said a few minutes ago, that we're seeing some improvement and stabilization in the overall markets and we're executing well to that.

To get double-digit growth in equipment in any market on a consistent basis is a tall order.

But we feel that we'll still grow in equipment and we have good opportunities there.

And every so often you get a benefit of upgrades or other activities that allow you to exceed your normal growth rate.

But our German business is, in general, I think we can say, and our European business is quite stable.

We're very pleased with our management team.

Just had our German national sales meeting and the morale is really very, very good.

And I think our management structure is very deep, our management team in Europe.

So we feel comfortable -- don't want to comment in a particular quarter, but feel comfortable that we'll continue to gain market share in Europe and in fact globally in all of our dental businesses.

That's really helpful.

And then just as a follow-up kind of looking more broadly at this time last year, we had concerns about the fiscal cliff and some tax increases.

But when you look out to 2014, how do you feel around kind of how dentists are willing to spend on equipment?

Do you think there is kind of more receptivity to that?

And maybe especially as it relates to CAD/CAM, what are you seeing there?

I think at the end of the day, equipment is going to be sold basically based on replenishment or replacement of equipment that is not functioning any longer.

So don't think that's the big growth.

There's some opportunity there, but I'm not sure that's the big growth.

The big growth is coming from equipment where we can prove to the practitioner that two things will happen.

One is it will be an investment in the practice and increase productivity and profitability.

And the second is in order for that to happen, it also would have to be equipment that adds to the quality of clinical care.

And by the way, this is not only for dental.

I think the same would be the case in medical.

And we feel that the digitalization of dentistry provides such an opportunity, especially coupled with software.

And we have invested significantly in our software businesses, both in the area of the cloud software, the Ascend software which we are starting to sell now and will make an important contribution to the effectiveness of practices.

And in addition to that we have invested in, as I mentioned earlier on, in the school software, in the large group practice software, various kinds of e-services.

All of this in combination of CAD/CAM, and with CAD/CAM, I believe, will drive our sales in equipment area.

And in general, yes, we expect to have some replenishment sales of the standard type of equipment.

But I think it's in the newer equipment that adds to productivity improvement and quality of care improvements that we will do well.

But we'll have to prove to the practitioner that is a worthwhile investment.

We are not back to pre-2008 times when these practitioners were just investing to change the color of the chair.

And I'm overstating that point.

Great, thanks a lot.

Michael Cherney, ISI Group.

This is James on for Mike, can you hear me?

Yes.

Just a question on guidance.

You talked about earnings accelerating through 2014.

I'm just wondering if you can I guess elaborate on the magnitude of the progression.

And then on top of that if you can talk, does 1Q reflect any of the weather impact you talked about earlier on the call?

Yes, I think there's a little bit of the weather impact that we're trying to consider in Q1.

Again, Stanley covered that in an earlier question.

While we don't believe that it will be material to us and we still feel very comfortable with our guidance, I think when we look at the progression for the year, there is a little bit of impact baked into that comment.

Really it's not a significant impact.

I would say that you probably are looking at the whole year is 7% to 9%.

You're probably a little bit below that range in Q1 and then accelerating throughout the year, which is really typical for us.

It's not just the weather; it's not just the acquisition to talk about.

We tend to, when we complete our budget cycle, when we are making investments in people or other things, we tend to hold off a lot of that until the budget is complete.

So it happens in Q1.

So it really is, if you looked, I think, at our historical trends it's probably a true statement that Q1 growth is always a little bit lower.

Again you have to back out acquisition activity related to that.

So it's not significantly material, but I thought it was important really to mention, given that it would not be even throughout the year.

Okay.

And then I think you talked to traffic at medical being flattish sequentially.

Just wondering if you could talk about traffic in the other businesses?

Yes, you know, we felt that if you looked at dental an animal health, first of all is really not a lot of great data on this.

A lot of this is looking at key products that are sold speaking to manufacturers, speaking to certain customers, speaking to some of the large group practices.

And I guess we feel that you probably saw in Q4 a little bit of an uptick on dental and dental patient traffic.

I would say animal health probably did not see that because, again, as I mentioned in the prepared remarks, because of cooler weather in Q4 than the prior-year, you had less flea and tick treatment, so less people bringing in their pet because of flea and tick.

But that's kind of just a timing thing.

But I think if you have to look at the big picture, markets are very stable.

We expect that they'll continue to be stable with some slight improvement going forward.

And we're hoping that that slight improvement could actually be better than that.

But we are trying to be conservative in our guidance when we're looking at overall market conditions.

Okay great, thanks very much.

Okay, so thank you everyone for calling in.

We are pleased with our results for 2013, excited as I noted earlier on with our plans for 2014.

At this stage we are quite comfortable that the markets are stable and that we at Henry Schein will continue to improve on our market share in each of our business units.

They each have goals to do that.

These teams are experienced (technical difficulty) delivered to the Company, each one of our business units.

Each one has plans for investment in growing their units.

Each one has plans for how they will deliver on their numbers.

And we are generally excited not only with the strategies for this year and the execution of the tactics in our strategic plan, but also for the strategic future of the Company, and very, very excited with where we're heading.

And thank you all for your interest and we will be back I think in 60 days, Steven?

Yes.

Thank you very much.

Thank you, this concludes today's conference.

You may now disconnect.