漢瑞祥 (HSIC) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein third-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, Shawntelle.

And my thanks to each of you for joining us to discuss Henry Schein's results for the third quarter of 2014.

With me this morning are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein, and Steven Paladino, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking.

As you know, risks and uncertainties involved in the Company's business may affect the matters referred to in forward-looking statements.

As a result, the Company's performance may differ from those expressed in or indicated by such forward-looking statements.

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, November 6, 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.

Good morning, everyone, and thank you for joining us.

Our third-quarter financial results were excellent.

And I'm delighted to report we gained market share in our four business groups.

In fact, each group posted strong sales growth both in North America as well as internationally.

So our gains were broad-based.

And again I would like to thank the team for doing such a good job.

Growth in net sales for the quarter was at the highest level we've reported in more than three years.

And looking at the metric of internal sales growth in local currencies, that figure was at a seven-year high.

So, we really are pleased with the performance this quarter.

Today, we are also pleased to be raising the low end of the 2014 financial guidance, while introducing guidance for 2015 diluted EPS that represents growth in the range of 10% to 12%.

In a moment, I will provide some additional commentary on our performance, and a couple of recently announced developments.

But first Steven will review our quarterly financial results.

So Steven, please provide the details.

Okay, thank you, Stanley.

And good morning to all.

I am also very pleased to report excellent results for the third quarter of 2014.

As we begin, I would like to note that the prior-year results for the third quarter included certain one-time items that had a net positive impact on our GAAP results of $0.01 per diluted share.

And when we exclude those items from our commentary in order to provide better analytics, we will refer to non-GAAP net income and non-GAAP EPS.

Turning to our Q3 results, our net sales for the quarter ended September 27, 2014 were $2.6 billion, reflecting an 11.7% increase compared with the third quarter of 2013.

This consisted of 10.9% growth in local currencies, and 0.8% growth related to foreign currency exchange.

In local currencies, our internally generated sales increased 6.4%, and acquisition growth contributed an additional 4.5%.

You can find all of the details on our sales growth contained in Exhibit A of our earnings news release that was issued earlier this morning.

Our operating margin for the third quarter of 2014 was 6.6%.

That is a decline of 20 basis points compared with the prior year.

However, when excluding the impact of acquisitions completed during the past 12 months, and related expenses, our operating margin was essentially unchanged or flat compared to the prior year.

When we look at our effective tax rate for the quarter, it was 30.0% and that compares slightly down from 30.1% in the third quarter of 2013.

Note that that excludes the benefit, the one-time benefit, of the overseas tax adjustment from the prior year.

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

We expect fourth-quarter effective tax rate to be similar in that 30% range for fourth quarter.

Our net income attributable to Henry Schein for the third quarter was $114.8 million or $1.34 per diluted share.

This represents growth of 7.8%, and 9.8%, respectively, compared with the third quarter of 2013, on a non-GAAP basis.

Again, you can see details to this on Exhibit B of our news release that was issued this morning.

Foreign currency exchange rates did not have any material impact on EPS for us during the quarter.

In fact, the rates were relatively consistent for the Q3 last year, on an average basis, versus Q3 this year.

Let me now provide some detail on sales results for the third quarter.

Dental sales for the third quarter 2014 increased 9.7% to $1.3 billion.

This 9.7% growth consisted of 9.4% growth in local currencies, and 0.3% gain related to foreign exchange gain.

In local currencies, the internally generated sales was 4.8%, and acquisition growth contributed another 4.6%, and that is primarily related to the BioHorizons acquisition and the Arseus acquisition.

If we look at that 4.8% internal growth in local currencies, 5.5% was in North America, and 3.7% was in international dental sales.

I will give you now some additional detail behind each of the North American and international numbers.

The 5.5% internal growth in local currencies for North America included 5.6% growth in dental consumable merchandise, and 5.2% growth in dental equipment sales and service revenues.

The 3.7% constant currency internal growth in international consisted of 3.2% growth in dental consumable merchandise, and 4.9% growth in dental equipment sales and service revenue.

So, you can see both domestically and internationally on consumables and equipment, we had very strong sales growth across the board.

Animal Health sales were $758 million in the third quarter, which was an increase of 18%.

This included growth of 15.9% in local currencies, and 2.1% related to foreign currency exchange.

Our internal sales in constant currencies grew 8.1%, and acquisitions contributed an additional 7.8%, and that's primarily related to the SmartPak acquisition in the United States and Medivet in Poland.

Of that 8.1% internal growth in local currencies, North America contributed 10.9% growth, and international contributed 5.6% growth.

We still have the normalizing impact in the US animal health business.

And if you normalize for the impact of certain products, switching from agency sales to standard sales, our North American sales growth was slightly less than the reported sales growth, and was 9.6%.

Still a very strong number.

Medical sales were $480.3 million in the third quarter, an increase of 8.0%.

Foreign exchange did not have any impact on our sales growth for the quarter.

And the sales growth was pretty consistent, with 8% growth in North America, and 8.1% growth internationally, both in constant currencies.

We did have good sales of seasonal influenza vaccines that we sell.

For the quarter we sold $62 million.

That compares to $52 million in the prior year's third quarter.

That is about 6.8 million doses of flu vaccine that we sold.

And through yesterday, we have sold approximately, or just about., 9 million doses, which represents essentially all of the season's supply.

If you exclude sales of flu vaccines from both periods, we still had very strong medical sales growth for the quarter, and that growth was 6.8%, and 6.7% in constant currencies.

So we continue to remain confident that our strategy of focusing on large group practices continue to result in market share gains.

If you look at technology and value-added sales, they were $87.1 million for the quarter, which was an increase of 10.4%.

That includes 9.5% growth in local currencies, and 0.9% growth related to foreign exchange.

And the internal growth of that constant currency growth was 6.5%, and acquisition an additional 3%.

If we break out between North America and international, that 6.5% constant currency internal growth was 5.4% in North America, and 13.4% internationally.

Remember that we also have a normalization adjustment related to a switch of a dental software product to agency sales.

This occurred at the beginning of the first quarter, so will annualize by the end of this year.

But if you adjust for that, the normalized sales growth in North America was 11.4%, in our technology and value-added services business.

We are very pleased with this double-digit normalized sales growth in technology.

And we saw particular strength both in new software sales and financial services.

We continued to repurchase common stock in the open market during the quarter.

Specifically we repurchased 633,000 shares, at an average price of $118.32, which translated to approximately $75 million of purchase price.

This current repurchase of shares in the third quarter was not material to our EPS.

At the close of the quarter, we have about $74 million remaining authorized on our share repurchase program.

And we remain committed to our goal of somewhere between $200 million and $300 million of stock repurchases for the full calendar year 2014.

If you look at our balance sheet and cash flow, we had very strong cash flow for the quarter, $174.5 million, up from $152.8 million last year.

We believe we will continue to get good strong cash flow in the fourth quarter.

Some metrics on our working capital -- accounts receivable days sales outstanding was 41.2 days, which is a slight improvement over the 41.6 days last year.

And inventory turns were relatively constant, 6.0 turns in the current year, down a little bit from the 6.2 turns in the prior year's quarter.

I will also point out that, as we previously announced, we have taken advantage of some favorable market conditions in the credit markets, and we extended several of our credit facilities at attractive rates.

This, in combination with our strong cash flow, provides us with additional flexible to take advantage of both acquisition, as well as share repurchase opportunities, and any other corporate opportunities that may arise.

We feel these facilities will continue to support our long-term internal and acquisition growth, and continue to maintain a strong capital structure.

I will conclude my remarks by discussing our 2014 and 2015 financial guidance.

For 2014, we are again raising the low end of our guidance range and now expect diluted EPS attributable to Henry Schein, Inc.

to be in a range of $5.36 to $5.39.

On a full-year basis, this represents growth of 8% to 9%, versus the prior year, which excludes certain one-time items, and compares to the previously issued guidance which the low end of the range was $5.33.

So we raised the low end of the range by $0.03 per share.

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

Turning to next year, we did introduce 2015 financial guidance as follows.

We expect diluted EPS attributable to Henry Schein to be in the range of $5.90 to $6.00 per share.

That represents 10% to 12% growth compared with the midpoint of our newly-issued 2014 guidance.

I think it is important to note that the 2015 guidance excludes certain restructuring costs related to a planned cost corporate initiative, regarding rationalizing some of the Company's operations that will provide significant expense efficiencies.

We believe it is important to reduce some of our cost structure at this time so we can continue to invest in new initiatives to drive future growth going forward.

And, as you know, Henry Schein has had a history of innovation and change, and this is just another continuation of that theme.

We expect that this initiative, although it is still in the planning stage, to continue through most of 2015.

We expect the one-time costs related to this to be in the range of $35 million to $40 million pre-tax, or $0.29 to $0.33 per diluted share.

And as we have done in the past, we will show these items as restructuring costs on the face of our P&L, and when we report results we will show adjusted EPS excluding that because that is the way our guidance was developed.

2015 guidance, as is all of our guidance, again is for continuing operations but not any future acquisitions or other activities.

And I'd also like to point out a couple of things related to our guidance.

We have incorporated the continued strength of the US dollar, especially versus the euro.

As you know, about 20% of our sales are euro-denominated, and we don't hedge any foreign currency translation impact.

And of course, given where the euro is today to the dollar, we do expect next year that this will be a head wind, and we have incorporated that into our 2015 guidance that we introduced today.

So let me now turn the call back over to Stan.

Thank you very much, Steve.

I'm quite sure our investors understand that this is a time of rapid change in the markets that we serve, whether related to healthcare reform -- and indeed reform of the healthcare reform that we expect to see with the change in the Senate -- demographic shifts or customer consolidation.

It is important that we position ourselves as a company to serve our markets through these transitions.

Henry Schein has a long history of reinvention, and we know from our experience that the companies adapting to market changes are the ones that thrive.

As we look back on our 2012 -- January 2012 to December 2014 -- the strategic plan which sunsets at the end of this quarter, our accomplishments, we believe, are quite clear.

We expanded our operations to five new countries.

We successfully integrated 30 companies and added more than 2,000 team Schein members.

We reorganized to align our interests among our three global vertical groups.

Going into the strategic plan, we work globally, we're geographically organized.

We are now organized into a dental group -- a global dental group -- a global medical group, which is primarily US-based, and a global animal health group, with a strong horizontal practice solutions business -- in other words, software business -- and a strong horizontal technology business.

In addition to a strong vertical technology business, we have a strong financial services horizontal, both the practice solutions and the financial services horizontal service three -- dental, medical and animal health verticals.

This was accomplished during this three-year period.

We expect that our EPS will have grown by 11% on a compounded annual basis over the 2012 to 2014 period, assuming, of course, the midpoint of our 2014 guidance.

You have to take into account the fourth quarter which is not done yet.

By these measures, it has been a very good three years, particularly when viewed in the context of challenging global economic times.

But we must of course continue to look ahead.

Our vision continues to focus on helping practitioners improve the efficiency of their practices, so that they can focus on providing the best care to their patients.

As we enter 2015, and the 2015 to 2017 strategic planning period, the next period being January 1, 2015 and ending December 2017, we recognize that we need to optimize our operations in order to fund new initiatives to drive future growth.

We believe that the planned restructuring that Steven discussed earlier will provide the impetus to achieve the strategic priorities we have identified for 2015 to 2017.

These priorities include investing in growth opportunities that allow us to enter new product categories, all related to our customer businesses -- in other words, we will remain focused on dental, the physician marketplace, and the veterinary marketplace -- and at the same time we plan on expanding into additional geographic markets.

We will work on enhancing operating margin by improved operational inefficiencies, and establishing a sustainable optimization process.

And we will also be identifying and investing in up- and mid-market clients.

These are mid-sized practices that are rapidly merging, and of course the very large practices, through targeted cross platform products and services.

We will be strengthening our competitive position by securing more exclusive products that are a strategic fit.

And we will be targeting specialists and practitioners in ultimate care settings.

Developing new technology solutions as well as other value-added services that improve the customer experience and expand our position in the marketplace will also be a priority and need funding.

And, finally, we will continue to invest in the development of our number one asset, Team Schein.

I am confident that we have the right plans in place to lay the foundation for continued business execution, which in turn will allow us to continue to deliver the value that our shareholders have come to expect from Henry Schein.

This program that we have had in place really for decades now, and, of course, quite transparent to our investors since we went public exactly 19 years ago, has worked well for us.

Three-year strategic plans.

Realigning our resources.

We have done this successfully in all but one year, when we delayed it because of the 2008, beginning of the recession.

But other than that one year, we have had this process in place and it has worked very successfully for the Company.

Before I begin my review on the business groups, I will note that there has been some concern recently voiced about the slowing growth in certain European markets, and challenges in others.

As I will discuss in a moment, each of our groups has significant overseas presence, namely dental, animal health, the two verticals, and of course, technology, a horizontal.

Medical is not that significant in Europe.

And we don't have medical in Asia or Australia, New Zealand.

Each reported strong growth from the international operations during the third quarter, and indeed for the year.

And within international we posted steady growth in all of our major European markets.

The markets are relatively stable, although a few, like Germany and the UK, are more in the positive column, and Italy and Spain are more on the negative side, although we think, from our point of view, are stable.

And France has been a little bit up and down, but I think we are well-positioned in that market to continue to gain market share.

And now let me turn to dental.

We gained market share in our dental group during the third quarter, with growth of approximately 10%, both in North America and international.

In addition, internal growth in local currencies was at a multi-year high for North American merchandise, for international dental as a whole, and for the group in its entirety.

North America patient tracking dental offices was quite good, we believe, as reflected by internal merchandise growth in local currency of nearly 6%.

I don't think we can conclude from that, that if you adjust for inflation, say, 2%, 2.5%, that the dental market is growing at 3%-plus from a visits point of view, but we can conclude that the businesses of dentists is growing and at the same time Henry Schein is gaining market share in terms of units.

Our international dental results reflect balanced growth between merchandise and equipment, with equipment growth in particular bolstered by strategic acquisitions, including Arseus and Sirona transactions in Europe.

We saw particular strength in Germany, the Netherlands, Belgium, and Italy.

As we continue to expand our global footprint, we were delighted to recently announce our entry into Japan, which is the world's second largest dental market.

With our noncontrolling investment in Iwase Dental Supply, Henry Schein now operates in 28 countries.

Iwase is the number three dental dealer in Japan, primarily services the Tokyo region with dental consumables, implants and equipment.

Sales for the year 2013 were about $190 million.

Iwase is a family-run business that it is led by Kenichiro Iwase, Ken, the third-generation family member to run the company.

Mr. Iwase has been named Managing Director of Henry Schein Japan, and under his leadership we look forward to pursuing additional partnerships in the Japanese market.

The model we are following in Japan is similar to all of the other markets that we have entered into over the years, but we have always sought top-notch professionals that understand the particular market, dental, medical or vet, and had an entrepreneurial bent, and would work well with our senior management.

And this is definitely the case with Ken.

We are excited about the opportunities in Japan, which has about 68,000 dentists, serving a market being fueled by an aging population, and of course, increasing demand for elective procedures.

Let me now turn to the animal health side.

We also gained market share in this group, with strong internal growth in local currencies bolstered by strategic acquisitions.

Internal sales growth in local currencies was at a seven-quarter high for this group.

Internationally, we saw particular strength in the UK, Spain, and Austria.

During last quarter's call, there was some discussion about the decision of IDEXX Laboratories to change from a distributor sales model to a direct sales model for its veterinary diagnostic instruments in the United States.

Recently, we were pleased to announce new strategic relationships with Abaxis and Heska, where Henry Schein Animal Health is now offering great solutions, we believe, and even better solutions to come, of a full line of veterinary diagnostic products.

Henry Schein is committed to helping our customers run efficient, profitable practices, while delivering high-quality care to our patients customers' patients.

Our competitive animal health business is the largest in North America.

And our customers consistently rely on us for a comprehensive line of products and services, including the full range of veterinary diagnostic products, such as instruments, consumables, and rapid assays.

The Abaxis and Heska products we now represent are excellent, and we just have announced these new agreements.

And our goal is to increase market share for each of these suppliers, and, indeed, for the whole category.

This is not the first time we've had to switch from a distributor-friendly, or distributor-modeled manufacturer, to one that goes direct.

And I'm sure that over time, we will do very well considering the fact that we have an outstanding sales force.

And, importantly, Henry Schein healthcare's practice management software offers robust clinical integration features to connect with both companies' diagnostic systems -- and more to come.

We are very pleased with the plans that are being made by our technology group to advance the integration of diagnostics into our software systems.

And we are also pleased to be able to hit the ground running with these products, and look forward to continued success from the veterinary diagnostic market, not only in the US but globally.

We have some good plans, as I said, and have total confidence in our global animal health team to execute on these plans, and continue to provide terrific value-added services to our animal health customers.

So now, let me turn to the medical business.

Quarterly medical sales was at the highest level in a year and a half, as we made continued progress with large group practices, and the IDNs -- the integrated delivery networks.

As I have said in previous conference calls, the onboarding process for these large customers generally is longer than it is for the small practices or the solo practitioner.

Yet, while it may take longer to secure these new relationships, it is actually a little easier to secure them, but to bring them on board, is the challenge, whilst the business is being secured.

The size of the opportunity makes the effort all very worthwhile, and we are pleased with our efforts and progress to date.

This was a decision we made in the strategic plan of 2009, 2010, 2011, the one before the plan we're in, to establish our healthcare services group focused on the large practices in the medical arena.

And that investment, switching resources particularly into that part of the business, has paid off very well, as of course it has for almost two decades in the dental arena where we believe we are the largest provider of products to group practices and to dental schools.

Let me now turn to the technology and the value-added services businesses.

Our sales growth this quarter reflects particular strength in software sales and financial services, as well as strategic acquisitions overseas.

We are delighted to report the continuation of double-digit internal sales growth in local currencies, in international technology, and value-added services.

During the quarter, there were two developments in particular that underscore our commitment to digital dentistry and its importance to the future of the dental profession.

First, in early August, we opened new headquarters for our domestic dental practice solutions business.

The new facility in Utah features an innovative center of excellence which is outfitted with high-quality digital dental equipment, technology from a number of our value-added suppliers.

The center of excellence is not only a showcase for innovative products, but also provides local dental professionals with a modern facility to offer three high-quality ROK to communities underserved, fitting very well with the Henry Schein's culture and business model of doing well by doing good.

And in late October, along with the publisher Quintessence, we hosted the first international symposium on digital dentistry.

The three-day event held in Orlando provided indepth educational experiences for dentists and dental laboratory technicians, on the clinical benefits of digital technologies and our philosophy of open platform work flows.

The symposium focused on procedure planning and treatment, including the clinical and aesthetic results of tooth restoration implants.

Attendees left with a better understanding of the significant patient benefits that digital technology provides in terms of accuracy, speed, comfort and appearance.

So let me conclude.

Before I open the call to questions, I would like to call your attention to just a few of the many activities at Henry Schein that do not necessarily drive top-line growth, but are integral to our business practices and reflect our commitment to corporate social responsibility.

In late August, we hosted our annual back-to-school program in 28 company locations affecting our growing footprint.

We expanded this program to include Europe for the first time with an event in Madrid.

This year, a record number of children, more than 5,000, actually, returned to the classroom with essentials ranging from new clothing to backpacks filled with books and supplies.

Since inception 17 years ago, more than 27,000 children have benefited from our back-to-school program.

In early September, we partnered with the large urology group practice association to raise awareness about the importance of prostate cancer checkups.

In recognition of national prostate cancer awareness month, we relaunched an educational plan to increase public awareness about the importance of early detection and saving men's lives.

And in October we opened the Henry Schein Ebola relief fund to support relief efforts related to the Ebola outbreak in western Africa.

This is the latest in a long history of relief programs we have sponsored around the world.

As a company and an executive team we have strong ties to the African continent.

And through the newest fund we will be matching the contributions of Team Schein members to support direct efforts through the CDC Foundation.

The money raised will augment the nation's personal protective equipment through Henry Schein Cares and to healthcare workers in West Africa.

I mention these three social outreach programs because we're often asked why is Henry Schein a company that produces steady results.

And the simple answer is that Henry Schein is a company that values our team, it is a company with a team philosophy, the team spirit, the intrapreneurship/entrepreneurship of a large business, has been very successful for us.

This includes our team being actively engaged in social responsibility, together with our suppliers, and our customers.

All of this leading to good rates of return.

And so I thought it was important for us to cover this with our shareholders, as well.

So, with that overview of our quarterly financial operating performance, I would like to thank you for your attention this morning.

And now, operator, we are ready to take questions.

(Operator Instructions) Your first question will come from the line of Jeff Johnson with Robert Baird.

Thank you.

Good morning.

Stanley, I feel like I should advise you some bed rest or something, but I am sure that doesn't fit with your seven countries that you need to be in over the next week or something like that.

Rest assured, it is not a cold because I did take my flu shot.

But I do have allergies and we haven't found a solution to that yet.

Got it.

Two quick here for me, if I could.

Steve, I was wondering qualitatively, maybe you could break out, on the North American dental consumables side, or maybe even worldwide dental consumables, what you are seeing on the general consumables side versus maybe on the dental implant side, some of the other specialty business lines.

Sure.

The good news is really, as I said in the prepared remarks, across really all of dental, we had a bit of an acceleration of sales growth.

And Stanley talked about that we do believe that's somewhat related to increased patient traffic, so we do think we are continuing to gain market share.

We had really very good growth on the implant side.

Both BioHorizons, which, as you know, is primarily in the US, had stronger growth than the big consumable average growth.

And Camlog on primarily the international side, the same thing is true, had stronger growth than the overall.

We also believe that the implant market is improving a little bit, continues to be good.

But those specialty products did perform a bit better than the core consumable products.

Helpful.

And then just in my follow up, on the equipment side of the business you have some tough comps upcoming even in the fourth quarter.

I know it doesn't look like a tough comp but from a revenue dollar basis I think it is.

With Section 179 coming down this year pretty hard, and you are going to start to come up against some PlanScan upgrades and things like that, just how should we conceptually be thinking about the dental equipment basis over the next, call it, three to four quarters, something like that?

I think it is a good point.

It is really impossible to determine that Section 179 has less tax benefit this year than last year, and what will the impact be.

My personal view is it will be a little bit of head wind, certainly in Q4, but longer term, if we go out a quarter or two or three more, I think the tax benefits accelerate people's decisions.

But they are going to make those decisions anyway.

So, it might be a little bit more difficult in Q4.

B

But we're still expecting strong mid to high single-digit growth in the dental equipment going forward into Q4.

You're right we co have a little bit more of a difficult comp with PlanScan upgrades and all of that, but there is life in the equipment market.

So, we feel good about it.

We certainly have all of that baked into our guidance for 2014 and 2015.

We really had a very strong traditional equipment sales growth in North America in Q3.

That is always a good sign, an indicator of how the practice is feeling.

So, while it always could be better, I think we feel pretty good about the equipment sales going forward.

And, as you know, next year is an IDS year, so that could, from a timing perspective, slow sales in Q1, and accelerate sales in Q2 and Q3.

So that is just normal stuff for us at this point.

But you should expect that in your estimates for 2015.

Understood.

Thank you.

Your next question will come from the line of John Kreger with William Blair.

Hi, thanks very much.

Stan, could you maybe just talk a little bit more about your strategic plan for the next three years?

There were interesting comments.

Number one, just to be clear, should we assume you are really going to stay focused on your three key vertical markets that are you already in?

And if we think about geographically, what sort of criteria do you use to figure out what countries you enter next?

John, very good questions.

Glad you asked them.

First of all, we have no intention of leaving the three verticals.

In fact, the strategic plan for us, the whole process, of course you should expect us to look at all opportunities available to us.

But the process reconfirmed our commitment to the dental marketplace globally, not only of course to the GP, but to the specialists, not only with consumables and equipment but with specialty products -- pharmaceuticals, med-surg products, software, and a plethora of value-added services.

So, that is clear, dental.

On the medical side, our focus on the domestic market here is clear, and the opportunities are, we believe, huge, as we advance consolidation, large group practices, multi-specialty, single-specialty and as the IDNs enter the space.

The more professional supply chain management focuses on this field, the more they realize that Henry Schein is an ideal model.

And, so that is an area to focus on in the medical world.

Plus we believe advancing our specialty business in the medical world is another huge opportunity.

We have done a little bit of that, but nowhere near as far as we have done in dental.

Lots and lots of opportunity.

And on the animal health side, we are committed to that business.

Lots and lots of opportunity.

And in particular in the non-pharma segment where we see equipment, med-surg products, diagnostic equipment, we think there is a large opportunity here for us.

Yes, we believe that in the US, we had a set-back, but we have had these set-backs before in the Henry Schein history.

And at the end of the day, our model contemplates a wide variety of products backed up, our services, has been very good for us and we will, I think, execute on that very well on the global diagnostic side of dentistry, as well -- the diagnostic side of animal health too.

We will, of course, continue to invest heavily in the software businesses, primarily focused in dental and animal health.

The new markets -- and I think to a large extent we are focused on dental and animal health.

I would not rule out something on medical, but our medical team is very busy right now, literally the amount of business that is available out there.

The market, of course, is not growing in terms of units that much, and there is price deflation in our sector, but the opportunity to garner market share is really good, as well as for bringing out new products to our offering.

So I don't think that is an area globally that we will focus, but you never know.

It is certainly not in our plan.

Although we have some nice businesses and we are going to put medical products through those businesses, I don't think we'll expand geographies.

The geographies, I think there is lots of opportunities still to expand in the United States -- North America, shall we say -- in the verticals that I just described.

Globally, yes.

Also in the developed world.

But I think there are opportunities in the developing world -- for example, our businesses both in South Africa and in Brazil, which really we put our toes in the water, are doing quite well and I think we will do more there.

It is amazing how well we are received by customers and suppliers.

And of course, there is Asia.

New product categories -- tons of stuff -- digitalization of dentistry, digitalization of medical world, of the veterinary office.

We want to do things to expand our operating margin and particularly our gross profit, and at the same time investing in efficiencies and optimizing our business processes.

The up market and the mid market -- huge opportunities.

All of our businesses are moving into the up markets.

And the mid market is becoming important, and we are setting our teams to focus even more on these areas.

The up and the mid market, separate teams.

Of course we would like to see more exclusives, so we can perhaps control our own destiny a little bit better.

And I think you will see that.

We have dialogue with a number of manufacturers going on.

Of course, we want to expand our offerings, so that we really offer everything a practitioner may need.

There are parts of our offering where maybe we can add a higher-quality product, other parts of the equation where we can add a lower-priced product.

All this stuff is in the plan.

The specialists and practitioners are important, all in the alternate care setting.

Technology, technology, technology.

We are going to invest in this.

We've got great platforms.

We've got to do more in that regard.

We already have a lot of work done in the cloud, on the dental side.

We need to expand that.

And of course, we will continue to invest heavily in the education of our team, bringing young managers on board, advancing our succession plans in all of our businesses.

So there is a lot to do here but those are the essential highlights and we will focus, as we have in the past.

We have huge opportunities and we just can't do -- as our President James Breslawski always reminds -- we can do anything but we can't do everything, and we, I think, have a very tight list of things we want to do.

And we will execute on them as we have in other strategic planning periods.

Thanks very much.

Maybe just one quick follow-up for Steve.

Steve, given the strong top line that you had in the quarter, can you just talk a bit about why you didn't see EBIT margin leverage?

And could we expect more margin leverage as we move through 2015?

I will take the second half of the answer first.

I think we absolutely expect to see more margin expansion going forward.

This was really a case -- the margin decline really was all related to new acquisitions.

As you know, when they come on board, until we could integrate, until we can get some synergies, they typically have a dilutive impact to margins.

Without that, we were relatively flat, but we did make investments in a number of areas.

And we did have sales mix issues working against us.

But again, as I started, I do think we are good about getting the margin expansion going forward.

Some of the restructuring activities will help that going forward.

But most of the restructuring activities really are designed to allow us to invest in new initiatives to grow the business, to have that sustainable growth model like we have always strived for since going public almost 20 years ago.

Great.

Thanks very much.

And your next question will come from the line of Jon Block with Stifel.

Great, thanks.

Good morning.

Maybe just the first one, if you could speak to how the trends in the quarter played out in North America and international within Dental.

And have you seen momentum as we entered the fourth quarter?

And then, Stanley, specifically for you, in your opinion, what do you think is allowing international dental to be what seems like more resilient than one would expect if you just sat here and looked at all of the headline risk?

And then I have a follow-up.

Thanks.

Thanks.

First of all, I think our view is relatively consistent for the last several quarters.

On balance, the developed world economies are leaning in the positive.

Yes, there are particular challenges in Europe.

But our anchor, of course, in Europe is Germany.

I wouldn't be able to represent it is the best economy we've ever had in Germany but it is pretty good.

And the UK is not bad.

Within our businesses, there is some movements between different classes of customers in the UK A customer bought a distributor, so that caused a bit of disruption.

I doubt that will work long time.

It certainly has backfired and we have been able to pick up a lot of other business.

So you have those kinds of things that happen.

But overall, I think the businesses are leaning in the positive.

So, we just need to make sure that the world stays stable from a political point of view.

And I think we continue to see good solid progress.

It is not 2008 numbers, but we are in the positive column.

And then we continue to gain market share.

And why do we do that?

I think our model works well.

Our model, which is a model of database marketing, telesales-driven, with heavy e-commerce.

And then the umbrella over all of this is our field sales consultants.

We have gradually over the years moved our sales force from a sales force of order takers to a sales force of consultants, helping the practitioners with consulting advice.

Now, it is not absolute.

Not every business works using this model perfectly each day.

But it is a gradual movement.

And I think the investments have paid off.

If we didn't have those investments, our operating margin could jump up quite quickly.

But we continue to believe we need to put money aside to advance our model, whether it is in the database marketing area, in the telesales area, or educating our consultants to be better advisors.

And this is all an investment that I believe will pay off well over the years to come.

And of course, it is our culture, and our culture drives it, as well.

So there is very few products at Henry Schein that are patented.

And why are we more successful than competition?

It is because of the culture in the company.

You put all of this together, and I think it works here and it works in Europe.

Of course being abroad, and of course being in Europe, of course being in China, even Australia and Canada, are slightly different cultures, to the way we do things in this country.

So, we have invested in management over the years, in all of the countries we are in.

You take a look at both Brazil and South Africa, we have young MBAs that we brought on board a decade ago to prepare us for entry into those two markets.

So, we make these investments, we invest, and the shareholders do well in the long run.

The investments are now continuing in other markets.

So, I think it is the model and it works for us.

And just to tap real quickly the other part of your question, if you look within the quarter, the good news is that on a month-by-month basis -- and I will focus on the non equipment, non technology, because equipment and technology there is always a little bit of lumpiness where the strength is always in the third month of the quarter, just because of the way we promote and the way commissions work and things.

But if you look at the consumables, very steady month to month, no major -- just general, of course there is always an exception here or there, but strong growth for each of the three months of the quarter.

And the good news is, going to date in Q4 we have seen some of that strength continue.

So we feel pretty good about the end markets.

We feel pretty good that we are seeing a little bit of improvement in patient traffic on a general basis.

And hopefully that will continue even to a larger extent.

Great.

Thanks for that.

And the follow-up, which admittedly may have two parts of it, Steven, you mentioned that North American dental equipment was up 5.2%.

I think you said basic was particularly good.

Did high-tech actually lag basic in the quarter?

And do you have the growth specifics of the PlanScan division?

And the last one, Stanley, you mentioned the integration opportunity with practice management on the vet side.

And clearly that is a big opportunity.

I think you guys are literally the number one in three players on PMS.

How long will that take to integrate with Abaxis and Heska?

I'm just trying to get my arms around it.

Is it a three-month initiative?

Is it a year initiative?

Thanks for the color, guys.

I will answer and then Steven will get his specifics for you.

We have been investing in the clinical integration, the big data side of the practice management animal health side, for years.

And when I say years, I think we have owned these businesses now for, this is the third year.

So, from the day we actually made the investment in ImproMed and, of course, the various systems we have been selling -- although that we were selling that we didn't own, including Avimark, and then we made the investment in Avimark -- it has been a three-year process.

And we have been investing and, more importantly, bringing the distribution side and technology side closer together.

We, of course, have experience on the dental side.

It took us a decade to get it right in dental.

Distributors and technology companies are very different.

They think different.

And they are both responsible, in our case, for their own bottom line.

But there's the synergies they were both able to work on together.

Never easy, but I think we've figured this out quite well and it paid off in dental.

The last years, we've worked well in that area.

As it relates to the specific systems, there will be pieces of integration brought together.

Some are already done.

Some will be done even better.

But there will be new products coming out all the time.

And I suspect that by the end of the January dental meeting in Orlando, we will have a lot more to show, and then we will have more to show as the year goes by.

And I'm not only talking about in the US, but globally.

I think it is an exciting time.

Sometimes you need a little bit of a wakeup call to get you to move a little faster.

Our strategies are unfolding.

Perhaps they were delayed.

We were hoping that we would benefit by perhaps even an alliance with IDEXX.

But at the end of the day, we got our team very focused.

I happened to meet yesterday with our animal health team in Kentucky.

There is a big horse show, auctions down there, and I was there with our equine team.

And I got to tell you, the team is so motivated, and they are ready in particular to go out after this diagnostic market.

So, we are very excited about the whole value-added service practice management solution opportunity in animal health.

And I think you will see a good plan unfolding a piece at a time over the next couple of years.

Just to answer the other part of your question, yes, as I said, if you look at our overall growth in equipment, we did see a little bit stronger growth in traditional equipment this quarter than the average, and a little bit less than the average in the high-tech equipment.

I don't think there is really a trend there.

I think what we saw was, when we looked at Q2, we really pulled, I think, maybe a little bit forward in Q2, with just the timing of when installation and sales occur.

And I think when we look at Q3, just because of the timing of the closing, I think some slipped into Q4.

Again, I don't think it is a trend, but the facts are that traditional did outperform high-tech during the quarter.

And your next question will come from the line of Robert Jones with Goldman Sachs.

Thanks for the questions.

Actually I just wanted to go back to the restructuring and thinking about the potential for organic margin expansion.

I know you guys had reset the goal at the analyst day for organic margin expansion on an annual basis to 20 basis points.

If I look at the numbers to date, Steve, it seems like you're slightly down year to date on the organic margin expansion, despite pretty nice top-line growth, and particularly in this quarter.

I'm just wondering if you can go back and talk a little bit more about the restructuring.

Is it needed at this point, to drive margin expansion as we look out into 2015?

Is it needed?

It will certainly be helpful to it, but it is not the main driver for the restructuring.

The main driver is, as you are planning and as you are looking forward, given, as Stanley said in his comment, given the changing dynamics in the market and in the world at large, we need to deploy resources in different ways than we did over the last few years.

So, it is a way of us saying we need to do more of this, and we need to do less of something else.

And that is how we can balance.

But it will have a positive impact on margins.

We don't have detailed plans yet, so you won't see anything early in the year.

You will see some but it will be more weighted toward the middle and towards the end of the year.

And we feel like this is something that is just so important for us to do because, we talk internally a lot that we need to invest in the future, but all of our investments can't be incremental.

You need to find ways of redeploying our resources and this is really how we are doing it.

Margins -- we also are very good at, during the quarter, looking at how we are tracking and deciding whether we want to make more or less investments.

Sometimes, like in the current quarter, where we saw that sales were doing well, we did a little bit more investment, and just seeing the impact of that which is not much margin expansion.

But that is by design because we are very good at tracking during the quarter and making tweaks in what we are doing along the way.

It's just something that we have developed over the years, and we hope to continue to do well.

The opportunity in our markets, the opportunity for preventative care, and the growing middle class throughout the world that understands this, is just endless, the opportunities.

And I think it is very important that we continue to invest.

And with a boost in sales, I would rather take some of that profit and invest it than show increased operating margin, and really mortgage some of the phenomenal opportunities that exist.

We've put our toe in the market, as an example, in South Africa and Brazil.

Why not expand in those markets?

There is no one providing our kind of service.

Why not bring software to different markets?

We could slow down on that or we could be aggressive on that, and we are investing.

And that's the idea behind this restructuring is to move assets from one side of the house to another.

It doesn't mean that that number of people are going to leave the Company, because we may move people from one side of the house to the other.

But at the end of the day, the opportunity exists for us to reposition the Company for greater return going forward, in a very exciting market.

I appreciate all that.

Just to push back a little bit, Stanley and Steve, it does seem like differentiating between investing and cost cutting here, may be a little bit semantics.

But I'm just curious, as you think about this restructuring, how are you differentiating between normal course of business, things you probably would be doing on an ongoing basis, to better position the business, reinvest in certain geographies, move resources around, versus a wholesale one-time restructuring where quite a big chunk of cost gets excluded from the operating results?

Okay.

The restructuring costs really loosely fall into three buckets.

And they are all under the theme of one-time costs.

And, again, we are not prepared at this time, nor do we really want to at this time, go into extreme detail.

But the three buckets fall into three areas, as follows.

One is we do expect to have some facility consolidations in our total worldwide network.

So, really, the costs, in order to consolidate facilities, to exit leases, or whatever, are part of the restructuring costs.

The second is related to head count.

And we do expect to see somewhere on average between 2% and 3% of our global work force.

So, it is a small percentage, a 2% or 3% net reduction in people.

And the third is, we have done a lot of acquisitions over the years, and as we look through some of those acquisitions, there are certain redundancies that, in order to get to those redundancies, we do need to complete some integration activities that are one-time in cost.

So, again, they are truly not normal activities.

We will show them as a one-line item as restructuring costs.

And, again, we feel it is important to do now because, again, there is a little bit of margin expansion built into that, but the bulk of it really is to try to redeploy resources, as I said a little bit earlier, in future initiatives.

So hopefully that is helpful to you.

It is.

Thanks.

We have time for one last question, coming from the line of Glen Santangelo with Credit Suisse.

Thanks.

Stan, I just wanted to follow up on some of your comments.

Obviously the Company, when you look in the dental division, posted obviously very strong organic growth this quarter, particularly in the wake of what we heard from the two big consumable manufacturers that was obviously a lot less inspiring.

You mentioned that the Company seemingly is taking share.

Is there anything other than just solid execution that you could point to?

Is there anything going on in the competitive landscape, in either North America, or international that is worth calling out?

I'm just curious to see where the share is coming from and if it is sustainable.

I don't think there is any particular change in our major competitors.

Perhaps even some of the smaller ones are getting better, but they don't move much in terms of volume.

But I think we were executing on our plans.

We haven't changed our plans.

We are just doing them a little bitter, I think.

I'm not sure if our market share growth is that different to what it has been in the past.

We have always grown, at least for quite a while, maybe one or two quarters has not been, but we have always grown at the GDP plus a few hundred basis points.

And I think the GDP is a little bit better in North America now, and maybe we grew a little bit faster this quarter.

But our plans are solid.

They're the same plans.

It is educating our sales force, better use of database marketing, it is a more effective collaboration between telesales and field sales.

We have unique assets.

No one has a telesales business like we do and a field sales force like we do.

And the software is working well.

Lots of good things going on there, both in terms of our catalog software, Internet capabilities, the connection between that and our practice management software, the specialty businesses, the whole CAD/CAM initiative.

And I don't think you could look at any one quarter, but that carries momentum throughout the business.

So, thousands of little things that make up the whole.

All right.

That's helpful.

Maybe if I can just ask one follow-up question to Steve.

Steve, as you look at the guidance for FY15, obviously this quarter you saw multi-year highs in some of your divisions in terms of your organic growth rates.

How should we think about the sustainability of that trend and those growth rates embedded within FY15 guidance?

I know you probably don't want to get pinned down to talking about any specifics but any additional color in terms of the trends, the underlying trend of the strength of the businesses that you are assuming within that FY15 guidance would be helpful.

Thanks.

Sure.

We are assuming, if you look at on average 2015 versus on average 2014, that there is a slight improvement in end markets, because we have seen that.

We do believe it has occurred and we don't see any reason why we should see a pull-back to that.

But it is only a slight improvement.

As we always do when we introduce guidance, we try to be a little bit conservative because, really, that's the right thing to do.

There is a lot of time between now and the end of next year, and a lot of big different things could happen.

But we feel pretty good that the end markets are doing better.

And we will capitalize on that.

So, hopefully that provides the color you are looking for.

Okay.

Thank you.

Everyone, thank you very much for calling in.

Appreciate all the interest, the good questions.

And we will be back -- I think this time it is four months, right?

So, this will be in February.

As I concluded in many of these calls -- actually, usually conclude -- we are very comfortable with the business.

The morale in the Company is good.

We've got good strategies in place.

We are executing well.

And I think we will just continue to focus on steady growth in terms of sales and in terms of the bottom line, while turning our profits into cash, which really is the ultimate goal of our management team, and so providing increased shareholder value.

If you have any questions, please feel free to call Carolynne, our Head of Investor Relations, at --?

631-390-8105.

Or Steven at the same number except 5915 for the last four digits.

Thank you very much.

And have a good holiday season.

Thank you, everyone.

This does conclude today's conference call.

You may now disconnect.