漢瑞祥 (HSIC) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein second-quarter conference call. (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 and my thanks to each of you for joining us to discuss Henry Schein's results for the second quarter of 2014. With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein, and Steven Paladino, Executive Vice President and Chief Financial Officer.

Before we begin I would like to state that certain comments made during this call will include information that is forward looking. As you know, risks and uncertainties involved in the Company's business may affect the matters referred to in forward-looking statements. As a result, the Company's performance may differ from those expressed in or indicated by such forward-looking statements.

These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission. In addition, all comments about the markets we serve, including growth rates and market share, are 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, August 4, 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 that to a single question and a follow-up before returning to the queue. This will provide the opportunity for as many listeners 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.

Thank you, Carolynne, and good morning, everyone, and thank you for joining us.

Our sales for the second quarter were solid as we posted broad-based gains on a global basis. In fact, internal sales growth in local currencies of 4.3% was the highest we have reported since the fourth quarter of 2012. Our domestic sales rebounded from the effects of the severe winter weather in the preceding quarter and also is the quarter that should be compared to the IDS sales of 2013, which was a very good quarter from a dental equipment and, specifically, an international dental equipment growth point of view.

Having achieved year-to-date diluted EPS ahead of our expectations, we are also pleased to be raising the lower end of 2014 financial guidance range by $0.04. So overall, we are pleased with our performance in the quarter, steady growth in market share in all of our business units. And we will provide further comments as the call goes on.

So, let me start by asking Steven to provide comments on the financial results and then I will come back with some comments on the business in general. Thank you.

Okay. Thank you, Stan, and good morning to all. I am also pleased to report solid results for the second quarter of 2014.

As we begin, I would like to point out that in 2014 both Easter and Passover holidays occurred in the second quarter whereas in 2013 they both fell in the first quarter. Easter -- the Easter holiday in particular has a more pronounced effect in certain international markets resulting in one less selling day because Good Friday is a national holiday in Canada and many European countries.

So now turning to our Q2 results. Our net sales for the quarter ended June 28, 2014, were $2.6 billion, reflecting a 9.3% increase compared with the second quarter of 2013. This consisted of 7.9% growth in local currencies and 1.4% related to foreign currency exchange. In local currencies, our internally-generated sales increased 4.3% and acquisition growth contributed 3.6%. You can see the details of our sales growth that are contained in Exhibit A of our earnings news release that was issued this morning.

Our operating margin for the second quarter of 2014 was 6.9%; that is a decline of 45 basis points compared with the second quarter of 2013. When excluding the impact of acquisitions completed during the past 12 months and related expenses, our operating margin contracted by 27 basis points. And that 27 basis point contraction includes an improvement in operating expenses as a percent of sales of 32 basis points offset by a contraction in gross margin of 59 basis points.

The gross margin decline is primarily related to changes in sales mix in our businesses across all of our four groups of businesses.

Our effective tax rate for the quarter was 30.8%, which is down from 31.4% in the second quarter of 2013 and is in line with the guidance that we previously gave. The lower tax rate is due to continued implementation of tax planning strategies and also higher earnings in countries with lower corporate tax rate. We expect the effective tax rate for the remainder of the year to be in the 30% to 31% range.

Net income attributable to Henry Schein for the second quarter of 2014 was $116.2 million, or $1.35 per diluted share. This represents growth of 7.2% and 9.8%, respectively, compared with the second quarter of 2013. Foreign currency exchange did not have any material impact on our EPS for the quarter.

Let me provide some detail for our sales results for the second quarter. Dental sales for the second quarter of 2014 increased 8.6% to $1.4 billion. This 8.6% growth consisted of 7.5% growth in local currencies and a 1.1% game related to foreign currency exchange.

If you look at local currencies, internally-generated local currency sales growth was 2.6% and acquisition growth contributed 4.9%. And that is primarily related to both BioHorizons and Arseus acquisitions that were completed.

The 2.6% internal growth in local currencies consisted of 4.3% growth in North America, while international sales were flat. If we look at some detail behind each of North American international, the 4.3% internal growth in local currencies in North America included 2.5% growth in sales of dental consumable merchandise and 10.8% in dental equipment sales and service revenue.

The internal international growth in local currencies included 2.1% growth in consumable merchandise, but a decline in equipment sales and service revenue of 5.5%. That is again due to the timing of the biennial IDS tradeshow in Germany which made for a difficult comparison in the prior year, as well as some impact of the Easter and Passover holidays.

If we look at Animal Health sales, they were $754.5 million in the second quarter, an increase of 13.2%. That included growth of 10.7% in local currencies and 2.5% related to foreign currency. Our internal sales growth in local currencies was 7.3% and acquisitions contributed an additional 3.4%.

If we look at the component of that 7.3% internal growth at local currencies, it included 7.9% growth in North America and 6.8% growth internationally. If you also normalize for the impact of business switching from agency sales to standard or normal sales, our North American sales growth was 5.6%.

Medical sales were $403.3 million in the second quarter, an increase of 4.0%, and that represent -- is represented by 3.7% growth in local currencies and a 0.3% growth related to foreign currency. The 3.7% internal growth in local currencies included 3.9% in North America and a slight decline of 1.4% international. We remain confident that our strategy of focusing on large group practices continued to result in market share growth this quarter in the Medical segment.

Turning to technology and value-added service sales, they were $89.1 million in the quarter, an increase of 14.2%. And this included 13.2% growth in local currencies and an additional 1.0% growth related to foreign currency. The local currency internally-generated sales increased by 9.3% and acquisition growth was 3.9%. The 9.3% growth internally included 8.5% in North America growth and 14.4% growth in international.

If you again normalize for sales results to account for a switch to agency sales, our internal growth in local currencies was 14.4% in the technology business. We are really very pleased with our double-digit normalized sales growth in the technology and value-added services businesses and we had strong growth also in our financial services subsegment of that category.

Related to stock repurchase, we continued to repurchase our common stock in the open market during the second quarter, specifically we repurchased 654,000 shares during the quarter at an average price of $116.43, or about $76 million. The impact of this repurchase on the second-quarter diluted EPS was not material and we continue to have money authorized for future repurchases. At the close of the second quarter we had $148 million authorized and available for future repurchases, and we remain committed to our goal of continuing to repurchase and to repurchase somewhere between $200 million and $300 million of our stock for the full year.

If we take a brief look at some of the highlights of our balance sheet, operating cash flow for the quarter was $199.2 million. That compares to $274.8 million in the 2013 second quarter.

We believe our full-year operating cash flow will continue to be strong. Some components -- accounts receivable, days sales outstanding -- was about 40.2 days compared to 39.5 days last year and inventory turns were 6.0 turns compared to 6.2 turns last year.

I will conclude my remarks by discussing our 2014 financial guidance. For 2014, we now expect diluted EPS attributable to Henry Schein should be $5.33 to $5.39. And as Stanley said earlier, this represents a $0.04 increase in the low end of our range and our guidance now reflects growth of 8% to 9% compared with 2013 results when you exclude that one-time item in 2013. And that again compares with our previously issued guidance of $5.29 to $5.39.

As always, our current year guidance is for continuing operations as well as completed or previously announced acquisitions, but does not include any potential new acquisitions. With that, I would like to turn the call back over to Stanley.

Thank you, Steven. Let me begin my review of business groups with the dental group.

We gained market share in our dental group with total US dollar growth in North America exceeding 8% and above 9% internationally. North America internal merchandise sales growth was bolstered by strategic acquisitions and equipment sales and service revenue growth in local currencies was quite good, was nearly 11%.

While sales of traditional equipment was strong, growth was even stronger in the high tech equipment arena and was led by our planned scan E4D CAD/CAM product.

International dental growth also reflects strategic acquisitions, while internal equipment sales and service revenue in local currency declined by a few percentage points from a stronger prior-year comparison that, of course, was driven by the biennial IDS show in congress in Germany, as Steven mentioned earlier on. During the quarter, we entered into the Brazilian dental market via a 50% ownership investment in Dental Speed Graph. This is our first operation in South America and brings the number of countries where Henry Schein has operations or affiliates on the ground to 27.

Dental Speed Graph is the largest direct marketer and marketing provider of dental consumable merchandise in Brazil with a robust e-commerce platform, 2013 sales of approximately $28 million. Dental Speed Graph has 170 team members and approximately 55,000 customers in Brazil.

We have long sought to establish a presence in Brazil, which is Latin America's largest economy and the seventh-largest economy in the world. Brazil has an estimated 150,000 practicing dentists who serve a market whose growth is being fueled by aging population and an expanding middle class. There is also a keen awareness in Brazil of the importance of oral care. We are very, very excited about our entry into the Brazilian market and are quite optimistic about opportunities in Brazil in general.

During the quarter, we also completed a notable dental transaction in Europe. In early June, we acquired Sirona Direct, which is the dental distribution business of Sirona Dental Systems in France. Sirona Direct is the exclusive distributor of dental equipment for Sirona Dental Systems in Paris and Normandy and has annual sales of approximately $14 million.

We also entered into an exclusive distribution agreement with Sirona for the promotion and distribution of their full line of dental equipment to practitioners in most of France including the CEREC CAD/CAM system. We previously acquired various other businesses in France with exclusive regional distribution agreements of products manufactured by Sirona. Today, Henry Schein is established as Sirona's exclusive distributor to practitioners across most of France, which is one of the largest European markets for dental products, approximately 36,000 dentists serving an approximation of almost 66 million people.

We are committed to providing the French dental community, as we are throughout the world actually, with a comprehensive offering to meet all of its practice needs. Sirona's innovative products are an important part of our connected dental platform which is designed to bring the latest digital dental solutions to practitioners we serve in this quickly changing dental marketplace.

Very pleased that we now have a rounded offering throughout French markets. This is a market that has been good for Henry Schein for well over a decade-and-a-half, very, very exciting.

Now on the Animal Health side, we also gained market share in this group. During the quarter, with internal sales growth in local currencies at its highest level in six quarters, there a late start to the parasiticide season in the US this year. Of course, we know due to a severe winter, but domestic sales and sales growth returned to normal in the second quarter.

On the international front, internal Animal Health sales growth in local currencies was at a multiyear record high. We also significantly strengthened our position in the US equine products market with the acquisition of approximately 60% ownership in SmartPak, which was completed early in the third quarter.

SmartPak is the leading domestic provider of equine supplements and horse supplies with sales in 2013 of approximately $105 million. And 325 team members are part of this Company. It is really a fantastic company, a lot of energy, a lot of creativity, and of course, the market leader in its segment.

Their primary product is the patented SmartPak supplement feeding system which provides equine supplements in customized daily dose packaging. The Company offers more than 250 branded equine supplements, including its proprietary Smart Supplements brand. SmartPak also offers a broad range of equestrian supplies and accessories like apparel and riding equipment, pharmaceutical, and other equine and canine focused products.

We are fortunate to have acquired a majority ownership position in this fast-growing company with a deep, deep commitment to equine health and a keen expertise in sales and unique expertise in the digital marketing arena, too. So the whole sales and digital marketing arena, plus the equine offering, that make us so excited about this business which has a fantastic management team and organization in general.

In fact, SmartPak is a leading company in this e-commerce environment. SmartPak and Henry Schein share strong commitment to supporting animal nutrition and raising awareness of nutrition's vital impact on overall horse health.

Let me now turn to our medical business. North America, as I think most of our shareholders know, represents 95% of the total medical growth -- of total medical sales -- medical group sales. Sales growth accelerated sharply from the preceding quarter as we recovered from impact of the weather and, more importantly, made progress with our strategic focus on large group practices and IDNs. That is the integrated delivery networks.

Looking to the upcoming flu season, I am pleased to report that pre-booking of seasonal influenza vaccines are running in line with the prior year. We do expect to distribute 8 million to 9 million doses in the upcoming flu season.

During the second quarter, we announced a strategic agreement with athenahealth. Together our two companies will help physicians operate efficient, successful practices, as well, of course, as using technology and other consultative service to provide high-quality care through the delivery and use of athenaOne suite of services. These services include electronic health records, integrated revenue cycle management, and patient communication. We will jointly market these services to Henry Schein's customers as part of our [Health Connect] offering which helps physicians advance the digitalization of their practices.

We are extremely committed to being a trusted advisor to our medical customers and to helping practitioners operate successful practices, distinguished by improved patient outcomes and patient efficiency. On a forward-looking OpenCloud-based platform it is a great complement -- our platform is a great complement to many technological-driven solutions we currently offer.

The arrangement with athena, in the end, takes our Henry Schein know-how, connections with our customers, and complements that with the arrangement we now have with athena, we believe the leading provider of these kinds of services to the physician practice. We are very pleased with the progress in our medical business, specifically the progress we are making with large group practices and the gaining recognition we are experiencing amongst IDNs. And very, very excited as we move the Company forward in this arena.

Now let me conclude my business overview with the technology and value-added services. Sales growth accelerated in North America, compared with the preceding quarter, due to its highest level in more than a year with particular strength in software sales and financial services.

Very pleased with this group. Of course, this is a very profitable group, but more importantly, our technology and value-added services group provides enormous stickiness to our customers. And it is the key way in which we provide consultative services, supporting -- and related technology, and so provide a lot of advice and value-added services to complement our trusted advisor status within the practice.

We continue also, by the way, to be very pleased with the performance internationally [in this] group with double digit internal growth in local currencies for the past six quarters.

So we will open the call to questions in a minute. Let me just share two recent corporate developments with you here today.

First, the 2014 and Fortune 500 ranking of America's largest corporations has recently been issued. Henry Schein is now number 292 on the list, up from 296 in last year's ranking. To climb two spots on the Fortune 500 list in less than a decade -- 200 spots in the Fortune 500 in less than a decade, and of course -- and remembering the markets that we serve are not the huge consumer markets, etc., but the office space practitioner market.

So to climb this 200 spot on the Fortune 500 list in less than a decade is testament to Henry Schein and Team Schein's hard work, to our success implementing a strategic plan that focuses on many customer needs through value-added products and services in new technology, coupled with our terrific culture and values in the Company. Putting this all together really, in the end, creates the momentum that has resulted in Henry Schein having such a good track record.

By the way, this marks our 75th call as a public company and we are very pleased and proud of our track record. Let me take this opportunity to thank all of Team Schein and our Board for the tremendous support. And to our shareholders as well over the last 75 quarters.

Let me also now just give you an update on our Board. In early June, we announced that Dr. Dianne Rekow was elected to the Henry Schein Board of Directors. We are truly fortunate to have Dean Rekow join us as a director.

Of course, she is a prominent Dean and quite active in the dental academic and clinical environment, but it was Dean Rekow who played a key role in pioneering -- a key pioneering role in the field of digital dentistry, an expert in the development and performance of new materials and products for use in aesthetic and restorative dentistry, and a global thought leader in dental education.

Dean Rekow is Dean of King's College London Dental Institute and a Professor of Orthodontics. She previously was the Professor of Orthodontics at NYU -- was previously a Professor of Orthodontics at NYU for more than a decade. Has experience in management of dental -- of educational institutes in general, commercial experience in a previous position, so clearly, Dr. Rekow brings a wealth of not only dental experience but global dental experience and general business experience to Henry Schein.

Let me also take this opportunity to thank [Karen Maeshima] for her service on the Henry Schein Board.

So with that overview of our quarterly financial and operating performance, I would like to thank you for your attention this morning. Steven and I are now ready to answer any questions which you may have.

Angelique, we are ready to take questions.

(Operator Instructions) Michael Cherny, ISI Group.

Good morning, guys. So I wanted to dig in a little bit -- obviously there was a release out last week from IDEX related to -- or the week before -- I guess their distribution agreement designed to go direct.

You did quantify what you thought the impact would be from a -- specifically pulling that out of your arrangements, but as you think about planning to offset some of that with other items, how far in advance do you start to plan -- do you start the process of identifying partners you want to work with? And how far in advance can you start to actually move some of those additional products or replacement products through your channel?

Yes, thanks for your question; it's a very good question. Henry Schein is committed and has been committed to providing a full array of products and related services to our customers in all three groups. This is not the first time at all where a manufacturer has decided to change distribution arrangements with us.

We are extremely confident that we will not lose our market share in animal health globally. We remain confident that we will provide an outstanding offering of products, in this case products means equipment and consumables and related software to our customers. And I think in the end, Henry Schein will be a much stronger company in the animal health space and quite sure that our customers will be pleased with the offering.

Obviously, can't discuss today the exact plans we had, but you can remain sure we are comfortable that Henry Schein will have an outstanding offering of products for our animal health customers in this country and abroad.

Great. Then just one quick question on the CAD/CAM development. As you think about the E4D rollout, obviously you had a very big launch with that product back at the New York Dental Show, at least in December. How -- when you go into these products, are they more replacements for offices that are already doing in-office CAD/CAM, or is this you penetrating what would be more of a greenfield market?

Well, the mark for digitalized dentistry is relatively underpenetrated. On a global basis, it is hard to get an exact number, but it is somewhere around the high single digits, maybe low double digits. And it is our view, if one speaks to the experts in dentistry, that at some point in the next decade or so the digital dentistry for prosthetics and the connection of the dental office digitally to the dental laboratory -- this whole area will become standard of care.

There is a huge amount of activity going on here, from software to different forms of devices, the scanner, the various kinds of software, different milling solutions, both in office, in the lab, as well as all sorts of materials. So this is a huge market. And one needs to look at the market, not in terms of one device, one product, or a couple of devices put together, maybe even in the case of chair side CAD/CAM scanner, the software, the mold, but in a much broader sense.

In that regard, we really are at the beginning of this digitalization of prosthetics and so we're very excited. We see a huge opportunity here, and I think you can expect to see lots of development with many companies coming into this field on the chair side, but more importantly on the connectivity side, the implant side, the lab side, the milling of different kinds of prosthetics, customized prosthetics. It is the whole reinvention of dentistry. Very excited.

Henry Schein has been investing in the space for almost five to six years. And I'm not talking about just the chair side, but I am talking about the whole reinvention of dentistry through our global prosthetics group. And so the launch of one particular product -- maybe the one you referred to -- is not as important. It is important as a product, but not as important as the overall trends. And we believe we are very well-positioned across dentistry to help dentists understand the opportunities that are emerging in the digitalization of prosthetics and help them find a solution.

I think our role will be very, very similar to the role we played introducing PPC to dentistry almost 18 years ago where we went to dentists and suggested to them that they put a PC in the office. There were, at that time, I think 800 different software companies. And together with the dental community, the profession, we were able to create the leading brands and practice management software.

So it is no different to [that] or the role that Henry Schein played in bringing infection control -- the importance of infection control to the dentist in the late '80s. Henry Schein, I think, has a track record of helping dentists advance with the most important trends in dentistry and oral care and I think digitalization of prosthetics is no different. It is not a product situation; it is a whole solution and I think we are ideally positioned with our various businesses that we own, but more importantly, with our talented management in this arena, to help practitioners understand the importance of digitalization of prosthetics and the way Henry Schein can help them.

Great, thanks.

In fact, we have -- later this week, I think it is on Thursday or Friday -- Friday, we have the start of our Business of Dentistry conference in Vegas, which addresses just this point. And actually tomorrow we have the opening of our new technology center in Utah, which is significantly devoted to helping practitioners understand the trends in dentistry and helping them advance their practices, take advantage of these trends.

This is a whole exciting area and Henry Schein is investing heavily in terms of talent and businesses and stringing these businesses together in a very logical way.

Robert Jones, Goldman Sachs.

Just wanted to transition over to the consumables business. It looked like it was soft in, particularly in North America. I was wondering if you guys could just give us a sense of how that business trended throughout the quarter, so April versus May versus June? And then just your thoughts on the health of dental demand in the back half of the year.

Yes, I am not sure if one would view it as soft, per se, because there are lots of puts and takes. You see one number and overall, I think we are gaining market share in the markets. I am not saying the market is robust, but as we have mentioned in several calls now over the last, I don't know, four, five, six quarters, the dental market is leading in a positive direction. There is some deflation with a few products on the commodity side. There is introduction of new products, and overall, I think the industry is okay. It is not the best it has been, but I would say it is leaning in a positive direction and we believe we are gaining market share.

Remember, our sales are not -- that you see are not the traditional consumable number that a distributor may be reporting on, but as a composite of our consumables, our equipment, our specialty products. So it is a little bit more accomplished and I would say, again, that we believe that the market is leaning towards positive growth on balance and that we are gaining market share.

As to the future, I can't really tell you exactly, but we are contemplating that, at this point, in any event, that the GDP continues to grow in a slightly positive way, and that dentistry will follow the GDP in general and that Henry Schein will continue to gain market share and that is our view and that is the way we've planned this year and for many years.

No, that's helpful.

Hey, Bob. Let me just add one other thing, if I could, please. So we did talk a little bit about sales rebounding in Q2, and just to quote some numbers for you because we really did see it. If you look at the North American dental consumable merchandise, Q1 was 0.8% growth, and this is constant currency, local internal growth, but Q2 rebounded to 2.5%.

And similarly, in animal health where constant currency growth in Q1 was slightly negative, it rebounded to 7.9% in Q2, of which 5.6% is the normalized number, and even in medical, it rebounded from 2% in Q1 to 3.9%. So we really think that the overall market has normalized. We do think that sales growth trends, as Stanley said, given the economy, is continuing to improve. We are a bit optimistic that growth trends will continue, but at a very gradual pace.

No, that's actually really helpful. Steve, actually if I could just ask you on the operating -- organic operating margin performance in the quarter, looks like it was down about 60 basis points year-over-year. The trend hasn't been great there for a couple of quarters. Just was wondering if you could maybe share with us any sense by segment of where that margin pressure is actually coming from.

Sure, yes, I wouldn't really characterize it as margin pressure, but if you look at our report -- I'm going to peel the onion, so starting with the reported. The reported operating margin was down 45 basis points on a year-over-year basis. The biggest contributor to that was acquisitions, which includes amortization and deal costs. So if you pull out the acquisitions, as well as, by the way, the inventory step up at the buyer horizons, if you pull all of that out, that was the biggest contributor and contributed almost half of that margin decline.

The other components really are two things. One is fastest-growing businesses, the animal health business, which was fast growing also, is leaning -- as well as some other businesses -- leaning more towards corporate accounts, and as you know, they carry a little bit lower gross and operating margin, but still very nice profitability and returns on investment. That is the second contributor.

The third is really in our dental equipment business. Dental equipment sales carry a little bit lower gross margin than our core dental business. We had very strong E4D/PlanScan sales growth. There was also some upgrades that occurred in that product category, but it is important to note that even excluding the upgrades, PlanScan/E4D was our fastest-growing subcategory within dental equipment. S

So there is a lot of moving parts, but overall, it is really -- I wouldn't characterize it as pressure, it is more as sales mix within business units.

That's helpful. Thanks.

Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking the questions. Hey, Steve, just wanted to follow up on that point. In your prepared remarks, you talked about the gross margin being affected by a change in sales mix. Was that really just the dental equipment and that mix shift in animal health growth or was there anything else that you guys saw this quarter affecting the gross margin?

No, that was -- I mean there's a lot of moving parts, but those are the only real significant ones. The rest were really smaller movements within our organic margins, so the big ones were the two I just called out, yes.

Okay, great. Then in the medical segment, just wondering if you guys have noticed any uptick in order growth or utilization from your customers. Are they seeing any volume increases from Medicaid expansion and healthcare reform yet?

So I don't think it's -- I don't think any major trends can be noticed. There are some accounts that are experiencing some additional traffic because of this. I do believe -- and we have said this for a while now -- that this is a longer-term trend and I think healthcare reform will, in the long run, have a positive impact on [ROK], but I don't think we can say that we have experienced a significant across-the-board increase in business, because our customers are seeing more younger people at this stage.

So -- but I do think -- I do tend to think the public is aware of this. I don't think companies are necessarily fully aware of all the provisions which have just been made clear by the Administration. So I do think this bodes well for dentistry in general and over time, we will see more younger people going to see dentists.

Of course, dentists will experience some pressure on pricing per procedure, but that, I think in the end, will result in price pressure, but more units, and we, I think, are well-positioned to help those customers deal with practicing -- practice management. Most dental practices take advantage of Dentrix and Easy Dental and some of our other consulting services to really operate a more efficient practice while at the same time increasing the quality of care.

So I think this gives much more value to consulting with one of our consultants in practice management and inevitably good for our business model. But I don't think we can point to any specific immediate trends at this point, other than there is a lot of buzz -- I know that I will be talking about it in my address to the users at our Business of Dentistry Conference in Vegas. And so this is something that is more and more important, but it is not shifting any numbers in a material way at this point.

Great. Then just going back to animal health, other than the diagnostic change you will face in 2015, are you seeing any positive impact from the new products that have been launched this year, like Apoquel, the anti-itch medication for dogs? And then there were a couple of new oral flea and tick medications that had pretty strong demand.

You know, there are so many products that are puts and takes in the animal health business and for us to start commenting on any one item -- I think one of the products you mentioned we don't even carry. But suffice this to say, the market in the parasiticide started a little bit later this year and we believe that we continue to gain market share.

It is a good market for us. Some of the high-volume products are not necessarily the biggest moneymakers. Some of the slower-moving -- some of the smaller products are very profitable. We have very good strategies, I think, in place to advance the profitability of this market, the overall sales as well, and gaining market share.

So we remain very, very optimistic about our animal health business, have a great global management team. I just actually on Thursday spent time with our team in Poland and our European management team are more convinced than ever that we have a great, great team that will, of course, gain sales, market share and profitability for Henry Schein and some very good cash flow.

Excellent. Thank you.

Glen Santangelo, Credit Suisse.

Morning. Thanks for the question. It's actually Jeff Bailin in for Glen.

There has been a lot of discussion in the marketplace around one of the leading premium implant players potentially being for sale. I understand you are probably limited in your ability to discuss any specific properties, but given Henry Schein's investments in the lower and middle end of the implant market, could you just talk about whether a presence on the premium side of the implant market could ever make sense for you?

Obviously we can't comment on this deal that is being touted around Wall Street or any other deal, because if we do that means we will have to comment on all sorts of things. So our policy is generally not to comment on deals that have not been concluded so that there can be no inference as to whether we are interested or not interested.

But in line with the question that was previously asked, we are most committed to the future of dentistry and particularly the digitization of dentistry. In that connection, the implant is important, both the device itself and the prosthetic. And we need to be bigger players in the device and the prosthetics in all its forms, whether the prosthetics are custom milled or they are prefabricated.

And there is a lot of software that is involved in this. So one must be careful not to look at any particular part of the oral care equation, the whole area of practice management, clinical and otherwise, and pick one piece over the other. It is a whole continuum of care and we are very, very much understanding of the market today and where it is heading, and Henry Schein is committed, as the largest provider of dental products and services in the world, to continue to be the place where dentists look for guidance and the place where a dentist can find a one-stop solution.

So, there will be room in the implant market for the high end, as people refer to more expensive implants, the middle high quality, and I believe that both BioHorizons and CAMLOG have the best in implant systems in the marketplace. There may be less expensive, but if you look at Germany, for example, we are selling more implants and may even have more dollars than anyone else in the marketplace. It is debatable how close we are to the number one or whether we are the number one, but the bottom line is our solution in Germany, for example, and some other countries is working well.

BioHorizons is working well. And we will add to that, both in terms of the implant, the prosthetic, the software, the biologics, etc., so we are interested in growing our position in the whole prosthetics field on multiple fronts. We believe we are well-positioned through our global prosthetics group to understand the dynamics and have excellent solutions. So we are committed to the whole area of digital and prosthetics in general.

I appreciate all of that color. Maybe just one follow-up, again on the dental market. Appreciate your commentary from earlier. As we look at the international performance, is there anything worth calling out in any specific geographies in terms of either accelerating or decelerating growth that are areas to watch?

Yes, I would say, Europe in general is leaning towards the positive. You have to be very careful in sifting through what was a terrific IDS last year. I would say the market is leaning positive. There are a few markets that are not so positive, a few that are a little bit more positive, but general the market is positive.

I would point out the one market that is doing exceptionally well at this point, and that is Australia. I am not sure -- yes, I think there are probably people on this call that would recall for sure that lastly we spoke about a very negative market. The previous government had withdrawn funding for oral care and that sucked out a lot of sales from the market.

This government has reinstituted the support for oral care, providing access to oral care in general to the underserved, and the mood in Australia in the dental market is exceptional. I just came back from their national sales meeting and the mood amongst our salespeople, amongst our suppliers is excellent.

Again, I think we are well-positioned to provide solutions. We have an outstanding consultative salesforce down there. We are the leader in software, are well positioned in CAD/CAM and have a number of very exciting products and exclusives that we offer down there. So I would have to say that if I think through and look around the world, that is a very good market outside of the United States and Canada.

Great. Thanks for the questions.

Jon Block, Stifel.

Great. Thanks, good morning. Maybe just to start -- it was another solid quarter with North American dental equipment results. And, Steve, you mentioned a couple things before, but any color you can give specific to high-tech growth versus traditional? Then maybe if you could provide an update with where you are with the PlanScan rollout at Aspen practices? Thank you.

Sure, so I will give you some detail. The North American equipment growth, the total growth was 10.8%. Again, it was across-the-board in both traditional and high-tech equipment. Specifically, traditional equipment was about 6.8% growth and high tech was a little over 17% growth.

Within high tech, again, our PlanScan/E4D product was the fastest-growing category of all equipment, traditional or otherwise, so we are very happy with the performance there. I will also say that equipment, the backlog continues to be strong, so we didn't -- we had that strong equipment growth, but we continue to have a good backlog at the end of the quarter, both domestically and internationally.

With related to -- I don't know the particulars on the Aspen rollout, to be honest with you, but I would say that that was not a major driver in our overall sales growth. But I don't really know the particulars on that.

Okay, perfect. Fair enough. Then, secondly, just to shift gears, you started the Q&A off talking about animal health and specific to IDEX and you have mentioned you have seen other manufacturers go exclusive before. But can you talk to us specifically about your salesforce and your salesforce's ability to move market share and maybe what you've seen in the past when other manufacturers have gone ahead and opted to go down the direct road. Thank you.

I want to be careful not to turn (inaudible). It's a very good question, and if I were you I would be asking or trying to figure this out as well. But I want to be careful not to make this a negative comment.

So let me just begin with; I think you have seen in the dental market in the past perhaps one manufacturer or two deciding to limit distribution to one distributor or two, and I think you have seen our track record and our ability to respond in a professional way and, in fact, gain market share. I think you could see similar trends in the animal health space around pet food, nutritional food, and I think you have seen that we have also done okay in that regard.

We have also done very well in explaining to manufacturers that broad distribution is in the interest of the customer, as was the case when we made our investment in Butler Schein at the time; now Henry Schein Animal Health. Where at that time Henry Schein was representing five or six manufacturers and Butler at the time was representing one, because of market -- there were market issues. The manufacturers wouldn't allow us to -- one manufacturer wouldn't allow us to carry the competitor's line.

All of the stuff, in the end, when you open up the market, is better for the consumer and what is better for the consumer is better for Henry Schein. So if you look at all that history you will see that any time there has been a strength generally it's inhibited the market. Any time it has opened up, it is much better for a market.

Any time you have competition, it is better. I am a big fan of the free market and this restriction business in the end doesn't pay off. I think Henry Schein has a long tradition -- there are examples where it works better because you may need more resources in one way or another to advance the product, but I think Henry Schein's history as an outstanding value-added distributor has shown that we have always been able to find the right balance of products. There was restrictions on limiting us to sell dental chairs or there was restrictions at one point that limit us from selling anesthetic, because the leading anesthetic company at the time with 70% or 80% market share decided to go direct.

And we are the largest provider of anesthetic in the world today with sensors at one point or another. We were restricted from the leading brand. Today we are the largest provider of sensors, the largest provider of dental chairs, the largest provider of 3D x-ray. And all of these things they, in the end, are not good for the customer.

So I would say there are always exceptions and I am quite sure that our track record, if it is examined carefully -- Steven would be happy to take you through specifics; I don't think this is the time today to name particular companies. But this is all public information and you can see that, generally, Henry Schein has done okay. These things are sometimes a waste of time, but in the end, invariably, Henry Schein turns out to be a better Company.

Perfect. Thanks so much for the comments.

Jeff Johnson, Robert Baird.

Thanks. Good morning, guys. Just a couple quick follow-ups there.

Steve, was hoping I could go back to maybe Bob's question on the North American dental consumables market. And I hear your answer; things getting better sequentially and obviously you can see that in the numbers, so that's good. If I adjust for selling days, it seems like you maybe even were up closer to the low end of that, the normalized historical range we think about at 4% to 6% or so.

Is it fair to think then as we go through the rest of the year -- I know you don't guided by segment and don't guide growth in that, but it feels like if we adjust we get back up to that kind of number. Is it fair to think about that being a reasonable target for the back half of the year?

Again, I don't want to give specifics, but I do think that the potential for our sales growth to accelerate on the merchandise, we feel like there is potential for that to occur. If you look at within the quarter, both May and June were stronger than April, so it did accelerate within the quarter. July was also a good month for consumable merchandise for us.

Now one month does not make a quarter, so don't read too much into that, but it is still good directionally. So we do feel like there is potential for some slight acceleration going forward, but again, Jeff, since we don't give specifics, I would rather not be specific on that.

The May, June, July comments are helpful there, so I appreciate that. Then my only other question really is on the cash flow side; a nice rebound here this quarter, at least relative to last quarter.

Year-over-year still down. I think that is a comparison issue, if I remember right, from early 2013 where there are some reversals from late 2012. But bottom line, are you still thinking cash flow both operating cash flow and even it looks like free cash flow here can grow nicely above net income this year and kind of over the next few years? Is that still a reasonable target? One.

And, two, CapEx may be a little bit higher than we are thinking so far through this year. Just what should the CapEx target be this year? Thanks.

Okay, so, yes, we do feel like if we look forward on operating cash flow, it should grow at similar rates as our bottom line net income growth, so we do believe that that is a very achievable growth for us. Remember, there is a little bit of a more difficult comparison, both in Q1 and Q2, because last year on cash flow we got the reversal of the medical device excise tax, the buy-in that we did in the prior year. So there is a little bit of a more difficult comparable related to that.

And I am just trying to remember -- your second quarter on CapEx. Yes, this year the CapEx is a little bit higher than normal. Will probably be something just north of $60 million of CapEx, maybe in the mid-$60 millions, something like that, so it is a little bit higher than typical this year because of some investments. But we do feel good about, again, cash flow overall.

Okay. It just sounds like the CapEx run rate can slow down then a little bit from what we have seen in the first half. That's fair?

Yes, if we -- like I said, we should be in the mid-$60 millions, so -- for the full year.

Okay. That's helpful. Thanks.

John Kreger, William Blair.

Thanks very much. Stan, you have talked about digital restorative dentistry being a very big trend. Can you just contrast what you are seeing in the North American versus the European markets? Which region are you seeing embrace this trend more aggressively based upon the kind of order flow you are getting?

That is a good question. Look, digital dentistry -- digital prosthetic dentistry is much more than chair side, right? I think chair side gets a lot of attention because Sirona is a public company and Patterson and Schein are public companies, but there is a lot more to this -- the whole digital prosthetic arena.

Many of the companies in that space -- and I forgot to mention Dentsply and to some extent 3M as well. But for Dentsply and 3M, and particularly 3M, it is not -- doesn't come out in the numbers. So Wall Street is focused truly, I think, on the public sector, and there is much more behind this as the whole area of prosthetics is largely -- to a very large extent -- in the hands of small private companies, and some actually larger companies but in the private sector.

So the area of prosthetics, and just to go even further, you will see that you have the implants. So some of those companies do have -- the public companies do have an element of digital prosthetics as well. We have to understand this market in a very broad sense, and where it's headed.

As far as the chair side, I think Europe, of course, is a little bit more advanced because CEREC was introduced in Europe over a quarter-century ago, particularly in Germany. So the goal is, of course, to find new customers and then each new customer presents an opportunity for the digital materials, etc., etc.

So Europe is more advanced than the US; it is relatively new in the US, I would say primarily because it was only offer through one distributor. Now the market is being serviced by us as well, so now you have about two-thirds of the dental distributors with a digital solution. There is another one or two other solutions that are offered by some of our smaller competitors, but the whole awareness of digital dentistry prosthetics is growing.

So I expect the US to pick up in this regard off, I think, a smaller base per capita per dentist than Europe. I think the opportunities are good on both sides of the Atlantic and also in other markets, Australia as well. I don't want to comment on Japan because we are not in that market yet, but I believe there, too.

The whole area of digital materials is getting very, very exciting and there are a lot of players that will enter this market. I think you will see also some exciting materials coming from different players including Henry Schein. And I am not only, again, referring to the chair side, but that whole laboratory side as well, where there is a lot of activity going on -- smaller companies, a lot of innovation.

And the labs are automating in a rather rapid way. There are going to be fewer labs, bigger labs, more capital intensive. And so this whole market is very, very excited, but I caution Wall Street not to view this through the lens of just a few companies, but to take a look at the home market. I think for all the dental players this is going to be exciting.

I think, Danaher also just announced their entry into the space. So this whole world that is getting exciting and it is far more complex looking through the lens of one or two companies.

Very healthful, thanks. Maybe just one more. Steve, would you be able to give us your organic growth rates in some of those -- your dental specialty categories? I am curious of those are growing faster or slower than your general consumable trend.

The answer is generally yes. This quarter, though, because of -- again CAMLOG is probably the biggest of our specialty group, and because of one less selling day in Germany and that is their strongest market, you have to adjust for that. And if you adjust for that, the specialty numbers are growing at a faster rate than the basic dental consumable numbers.

Again, but you have to adjust for Germany because of that one less selling day.

Great. Thank you.

Okay, so thank you, everybody, for calling in. Appreciate your interest. I think we at Henry Schein are in three very, very exciting markets that are going through transformation.

We are there, ready to provide value-added services. We are there with not only our technology offering, but a whole host of value-added services. The dental market is exciting, going through transformation, and we are very well positioned -- the largest provider of dental products and services in the world.

Likewise, on the animal health side, a lot of exciting developments there. I believe strategically we are well-placed; we have made some good decisions along the way and are well positioned now to execute on those decisions. It is a global positioning, the largest distributor of animal health products; very, very exciting.

And then the medical business, we have been waiting for this transformation now for six, seven, eight years. We created our Healthcare Services group almost 6 years ago. They are doing well. They are doing well with these large accounts, with the IDNs.

Of course, this is all a trend; nothing materials going to happen in one quarter or two, but directionally, Henry Schein is well-placed. And I believe our strategies are good and the morale in the Company is good and we are generating good cash flow as a Company.

So I thank you for your interest. Have a great rest of the summer and we will be back again in about 90 days. Thanks.

This does conclude the conference. You may all disconnect.