漢瑞祥 (HSIC) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Henry Schein's third-quarter conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question and answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Carolynne borders, Henry Schein's Vice President Investor Relations.

Please go ahead, Carolynne.

Thank you and my thanks to each of you for joining us today to discuss Henry Schein's results for the third quarter of 2015.

With me on the call today 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 (inaudible) booking.

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 estimate.

The contents of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 4, 2015.

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 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.

With that said, I would like to turn the call over to Stanley Bergman.

Thank you, Carolynne.

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

We are so pleased with our third-quarter financial results, which reflected accelerated growth in adjusted diluted EPS, as well as in worldwide sales, despite the continued negative impact of the strength of the United States dollar.

As was also the case during the first quarter -- the first half, actually, of the year, the strength of the US dollar impacted all of our international operations during the third quarter and particularly those in Europe.

For the quarter, changes in currency exchange reduced our total sales growth by nearly 6% and reduced EPS by $0.06 both compared with the previous sales last year.

Yet, overall, the global markets we serve continue to be stable.

Through our long-standing strategy of organic growth, complemented by strategic acquisitions, we believe we continue to gain market share on an overall basis during the quarter, both in North America and internationally.

Today we are pleased to introduce guidance for 2016 adjusted diluted EPS that represents growth of 10% to 12% compared with the midpoint of our new adjusted 2015 guidance range.

In a moment, I will provide some additional commentary on our recent financial performance and business accomplishments.

But, first, Steve Paladino will review our quarterly financial results.

Steve?

Okay.

Thank you, Stan, and good morning.

I am also pleased to report solid results for the third quarter of 2015.

As we begin, I would like to point out that our 2015 third-quarter results include restructuring costs of $8.4 million pretax or $0.08 per diluted shares.

Our most recent estimate of restructuring costs to be recorded in 2015 has been reduced to $30 million to $35 million pretax or approximately $0.26 to $0.30 per diluted share.

This is a reduction from our original estimate of $35 million to $40 million pretax, and this reduced estimate is the result of certain restructuring actions being deferred to 2016.

As such, we expect to continue to record restructuring costs through the first half of 2016.

Our Q3 results also include a one-time income tax benefit net of a noncontrolling interest of $3.8 million or $0.05 per diluted share, and that is related to a favorable tax ruling that we received during the third quarter.

I will be discussing our results as reported and also on a non-GAAP basis, which will exclude both the restructuring costs and the impact of the tax benefit.

Since we believe that the latter is more useful for comparative purposes.

You can refer to Exhibit B of this morning's earnings news release, and that reconciles our GAAP and non-GAAP income and EPS from continuing operations.

Turning to our Q3 results, our net sales for the quarter ended September 26 of 2015 were $2.7 billion, reflecting a 2.4% increase compared with the third quarter of 2014.

This consisted of an 8.3% growth in local currencies and a decline of 5.9% related to foreign currency exchange.

In local currencies, or constant currencies, our internal generated sales growth was 4.8%, and acquisition growth contributed an additional 3.5%.

You can see the details of sales growth in Exhibit A of today's earnings news release.

Our operating margin for the quarter was 7.0% and expanded by 40 basis points compared to the third quarter of last year.

However, on a non-GAAP basis, which would exclude the restructuring costs, our adjusted operating margin for the third quarter of 2015 improved by 71 basis points and was 7.4%.

This expansion, which was very strong for the quarter, was a result of both higher gross margin, as well as a reduction of operating expenses as a percentage of sales.

If you look to our effective tax rate for the quarter, it was 29.6% on a non-GAAP basis.

Again, we are excluding the one-time tax benefit and the restructuring costs to show the non-GAAP effective tax rate, and that compares to 30.0% last year.

Again, the lower tax rate is due to ongoing tax planning strategies, as well as higher earnings in countries with lower corporate tax rate.

We continue to expect that our non-GAAP effective tax rate will be in this 30% range for the remainder of the year, as well as going forward into next year.

Our net income attributable to Henry Schein, Inc.

for the third quarter of 2015 was $127.7 million or $1.52 per diluted share.

This represented growth of 11.3% and 13.4% respectively compared to the prior year.

However, again, on a non-GAAP basis, net income attributable to Henry Schein was higher or $130.6 million or $1.55 per diluted share, and that growth is 13.7% and 15.7%, respectably, again compared to the prior year.

I think it is important to reiterate that the foreign currency exchange impact was not only negative $0.06 for the quarter on our EPS, but it is approximately $0.20 for the first nine months of the year.

And that is just converting foreign currencies into US dollars at today's average rate versus last year's average rate.

So it has been a big headwind for us in the current year.

Let me now turn to our sales results and review some details there.

Our dental sales for the third quarter of 2015 declined by 2.5% to $1.3 billion, but, again, this is related to foreign currency.

The 2.5% decline consisted of 4.6% growth in constant currency and 7.1% decline related to foreign currency.

In local currencies, our internally generated sales was 4.1%, and acquisition growth contributed another 0.05%.

Of that 4.1% internal growth in constant currencies, it consisted of two components, 4.4% growth in North America and 3.6% growth internationally.

Let's look at some additional detail on each of those figures.

First, the North American internal growth of 4.4% consists of 3.8% growth in dental consumable merchandise sales and 6.4% growth in dental equipment sales and service revenue.

Looking at the international business, the 3.6% constant currency growth -- internal growth included 2.9% growth in dental consumable merchandise and 5.3% growth in dental equipment sales revenue.

So across the board on global dental, we showed solid sales growth both in consumables and equipment, domestically and internationally.

Turning to animal health sales, they were $732.5 million in the third quarter, down 3.4%, but the components there is 4.5% local currency growth and a decline related to foreign currency exchange of 7.9%.

Internal sales growth in constant currencies grew 0.05%, and acquisitions contributed an additional 4.0% to growth.

That 0.05% internal growth in constant currencies included a 1.9% decline in North America and 2.7% growth internationally.

Again, as we have done for the first two quarters, we are normalizing our sales growth in international, and that 1.9% decline in internal sales in local currencies for North America actually reflects a 4.2% growth when you normalize both for the impact of product switching between agency and direct sales, as well as excluding sales of diagnostic products, both in the current period and in the prior period due to changes of veterinary diagnostic manufacturing relationships.

Again, we believe that this normalized growth rate is more meaningful and a better reflection of the ongoing performance of our North American animal health business, and we will continue to show this normalized basis through the end of the year.

Our medical sales were $597.2 million for the third quarter, and that is an increase of 24.3%.

It consists of 25.0% growth in local currencies and a small decline of 0.7% related to foreign currency exchange.

Overall, internal sales growth in local currencies was 13.6%, and acquisitions contributed an additional 11.4%.

As I think most people know, the bulk of our medical business is in North America, and that 13.6% internal growth was led by North America, which was 14.1%, and that, again, was driven by large group practices and IDNs, as well as a 1.3% growth internationally.

This 14.1% growth in the North American medical business was the highest level it has been in approximately eight years.

If we look at a component of our medical sales, sales of seasonal influenza vaccines were $68.9 million for the third quarter of 2015, and that is up.

There is a little bit of favorable timing.

It is up 12% over last year.

We sold about 6.6 million doses of flu vaccine during the third quarter, and through yesterday, we sold a total of nearly 7.7 million doses.

So we expect to sell for the whole year somewhere between 9 million and 10 million doses, and we are well on our way to achieving that.

If you exclude the impact of flu vaccine sales in both periods, the overall medical sales growth increased 26.2% and 27% in constant currency.

Turning to technology and value-added service sales, they were $89.7 million in the quarter, which is a 3.0% increase.

This included 5.8% growth in constant currency and a 2.8% decline related to foreign currency exchange.

In local currencies, the internally generated sales increased by 5.2%, and acquisition growth contributed an additional 0.6%.

That global 5.2% internal growth in constant currencies includes 4.5% growth in North America and 8.4% growth internationally.

If we turn to stock repurchase, we continue to repurchase our common stock in the open market during the third quarter.

Specifically we purchased approximately 261,000 shares during the quarter at an average price of $144.11, which is just under $38 million of cash.

This impact -- the impact of this during the quarter was not material to our EPS.

At the close of the quarter, we still have about $149 million authorized for future repurchases of our common stock, and we remain committed to our goal of buying between $200 million and $300 million of stock for the full year.

If we take a brief look at both our -- some highlights from our balance sheet and cash flow, we had operating cash flow for the quarter of $107.4 million.

That compares to $174 million last year.

If you look at the details, the decrease was primarily driven by working capital and increases in accounts receivable and inventory, although we continue to believe we will have strong operating cash flow for the year.

The days sales outstanding was favorable, 40.6 days in the current quarter versus 41.2 days last year, and inventory turns were slightly down to 5.7 turns versus 6 turns last year.

Finally, I will just conclude with going through guidance for 2015 and 2016.

I think it is important to remember that, over the last two quarters, we noted on our past two conference calls that we expected to be at the low-end of EPS guidance for the current year, primarily due to the impact of foreign exchange.

And, as I said, for the first nine months of 2015, foreign currency exchange translation had a negative impact, again, of approximately $0.20 on our EPS for the first nine months.

So because of that, we are now adjusting our EPS for the year to be in the range of $5.90 to $5.96, and that represents growth of 8% to 10% compared to the actual 2014 results.

The 2015 guidance excludes restructuring costs, which are expected to be between $0.26 and $0.30 per diluted share for the year, as well as the one-time $0.05 tax benefit that occurred in the third quarter.

Also, again, we now expect that these restructuring activities that were expected at the beginning of 2015 to be completed at the year will now -- a portion of them will roll over into 2016, and we now expect restructuring costs in 2016 to be $0.03 to $0.07 per diluted share and should continue through the first half of 2016.

As always, our 2015 EPS guidance is for continuing operations, as well as any completed or previously announced acquisitions, but does not include any impact for potential future acquisitions should they occur.

Turning to 2016 financial guidance, we're pleased to report that we expect adjusted diluted EPS attributable to Henry Schein to be in the range of $6.55 to $6.65, and that represents growth of 10% to 12% compared to the midpoint of our 2015 adjusted guidance range.

Again, the guidance for 2016 is for continuing operations, as well as any completed or previously announced acquisitions, but also does not include the impact of any potential future acquisitions and also does not include the impact of the restructuring costs of, again, approximately $0.03 to $0.07.

We also -- our guidance assumes that foreign exchange rates remain relatively consistent with the current levels.

So with that, I would now like to turn the call back to over Stan.

Thank you, Steven.

Let me begin by a review of our four business groups with dental group.

In North America, we believe that consumable merchandise internal sales growth was -- in local currencies was in the 3.8% range and indicates continued solid patient flow to dental offices.

Equipment sales and service internal growth in local currencies was a solid 6.4%.

It was the highest in more than a year.

I noted during our last quarter call that we expected North America dental sales and service growth to accelerate for the second half of the year, and these numbers bear that out.

We saw particular strength during the quarter in sales of what we internally call traditional equipment.

With international dental, consumable merchandise internal sales in local currencies grew at 2.9% during the third quarter.

International equipment sales and service internal growth in local currencies was a solid 5.3%, and this follows double-digit gains in the preceding quarter, which was bolstered by the IDS -- International Dental Show's growth.

Before we move on to our animal health financial performance, I would like to highlight an expansion of our dental operations in Italy.

We just announced an agreement to make an investment in Dental Trey, a distributor of dental consumable merchandise and equipment with sales for the 12 months ended June 30, 2015 of approximately EUR41 million.

Dental Trey offers more than 33,000 brand products and a line of private-label products to dental practices in the region through a team of sales agents and an e-commerce web board.

Dental Trey also sells proprietary dental practice management software system with an installed base of more than 1200 dental offices.

Dental Trey will complement our existing business in Italy with a solid product offering and long-standing customer relations.

We expect the transaction to close in the fourth quarter of 2015.

The acquisition is anticipated to be neutral through our 2016 diluted earnings per share and slightly accretive by less than $0.01 in 2015 and beyond.

Now, let me spend a few minutes on our animal health group.

North America internal growth in local currencies was 4.2% on a normalized basis.

Growth in our animal health group continues to reflect the benefits of strategic acquisitions.

During the quarter, we closed on our purchase of a majority interest in [cruiser heads].

Cruiser had sales in 2014 of approximately $90 million, and this expanded our direct presence to Denmark, Norway and Sweden.

Now we also expect -- and this is very important to introduce the Cruiser brand of products to additional markets and particularly through the Henry Schein businesses in the next year.

So this business is, of course, strategic from a geographic point of view -- a geographic presence point of view, but also important because of the unique Cruiser brand of products.

We are very, very excited about the agreement that we announced a couple of days ago to acquire 80.1% -- an 80.1% interest in another company named Vetstreet.

Vetstreet is a leading provider of marketing solutions and health information analytics to veterinary clinics and animal health manufacturers.

Vetstreet offers veterinary clinics a suite of products and services that address key issues, including communicating with pet owners once they leave the clinic and a lack of compliance of with wellness visits and prescription regimens.

When this transaction closes early next year, Vetstreet will be a meaningful complement to our US animal health businesses and, in particular, our practice management software installed base, which is at about half the veterinarians of this country.

It will expand our practice marketing and client communication solutions, provide tools for better enhancement of our supplier relations and connect us to veterinary clinics that are not current customers of Henry Schein animal health.

The transaction, which is expected to close in early 2016, is anticipated to be neutral to 2016 diluted earnings per share and add $0.01 to $0.02 of accretion in 2017 and beyond.

On the medical side, we have also a very exciting quarter.

Internal sales growth for our medical group in North America was 14.1%, an eight year high as we made further progress of large group practices in IDN and delivery networks.

This growth -- this internal growth was bolstered by sales from our strategic agreement with Cardinal Health, and we're delighted with the continued successful transition of customers to the Henry Schein platform.

The combination of internal growth, plus the contribution from the Cardinal Health agreement, results in 26% growth in North America for the quarter versus the prior year.

The integration of the strategic agreement into Henry Schein is substantially complete with the many components to be integrated during the current fourth quarter.

We remain optimistic about our ability to win new customers through our strategic agreements with Cardinal Health, but being uniquely positioned to directly serve the entire continuum of healthcare.

Now let me conclude with a short overview of our technology and value-added segment.

Internal sales growth in North America was 4.5% in local currency, and international internal growth was 8.4% in local currencies with particular strength through the quarter and the electronic services and the value-added services arena.

Henry Schein is committed to the efficient delivery of health services (inaudible) with our customers.

The advanced technology products and services we offer provide a platform for our sales opportunities across all of our businesses.

So before we open the call to questions, I would like to highlight some recent recognitions and initiatives.

As you may know, Henry Schein is committed to expanding access to care for the underserved throughout the world and to increasing diversity and cultural competency within the healthcare profession or each of the professions we serve, for that matter.

In August we announced the creation of Henry Schein Cares Medal, which will honor organizations whose work has been especially effective in bringing care to those in need, and (inaudible) next year we will be awarding medals to organizations from the field of oral health, animal health and medical health.

And also in August, Henry Schein was awarded the Corporate Award by the Hispanic Dental Association.

We received this in recognition for our decades of supporting initiatives to increase diversity and cultural competency in the dental profession for the US and global Hispanic communities, as well as for our commitment to promoting access to care and, of course, healthcare equity worldwide.

The Henry Schein Global Cares Corporate Responsibility Program was active during the third quarter.

We launched our 2015 Healthy Lifestyles, Healthy Communities program, which this year expects to serve approximately 8700 children and (inaudible) throughout the United States with free medical and dental services at 14 health fair events.

We again partnered with [Integrated Medical Foundation] and a large neurology group practice association to help raise awareness nationwide about the importance of prostate cancer screenings, and we have helped more than 5000 children return to the classroom ready to succeed through our 18th annual back-to-school program.

We also launched our new initiative with an organization called Canine Companions for Independence under which our puppy raiser care package are being delivered to veterinarians for their customers who volunteer to raise assistance dogs for people with physical disabilities.

On the academic side, we recently announced the partnership with the American College of Prosthodontists Education Foundation, along with other dental partners to develop a new CAD/CAM technology curriculum for pre-doctoral and postdoctoral programs.

This curriculum is expected to be piloted by several dental schools beginning in 2017.

We believe that CAD/CAM technology enhances dentistry, and we want to make sure that dental students are properly trained so they can improve practice efficiency to ensure better patient outcomes.

We are excited to be part of ensuring that the coming generation of dental professionals has the training required to derive the benefits that digital technology has to offer their patients.

So you will see Henry Schein has been successful in advancing our strategies by advancing the means of our suppliers, our customers, our team, our investors and society in general.

And it is the interplay between these five constituents that, at the end of the day, has provided Henry Schein with the opportunity to provide consistent earnings as we enter our 21st year as a public company.

Yesterday was the 20th anniversary of Henry Schein's IPO, and I think it is fair to say that our shareholders should be pleased with the consistent delivery of results, both in terms of earnings-per-share and in terms of taking those earnings-per-share and turning them into cash.

This is the direct result of the balancing of these five constituents.

So with that overview of a quarterly financial operating performance, Steve and I are pleased to take questions you may have.

(Operator Instructions) Robert Jones, Goldman Sachs.

Really impressive internal growth in medical this quarter.

Anything worth calling out as far as the drivers of that over 14% internal growth?

I mean, looking back several years, I am not sure we have seen this level of growth on the internal North American side.

I just wanted to, within that, also make sure that all of Cardinal would be accounted for in the acquisition-related growth.

So that is a very good question, and I think you have probably noticed that that is from the last five or six years, our medical business has gained momentum.

This has been the result of a strategic planning exercise we concluded about seven years ago in which we determined that there were two areas we wanted to focus on.

One is the larger practices in the networks and what has morphed into what many refer to as the IDN, integrated delivery networks, and, at the same time, focusing on certain specialty areas that are important, or potentially geared towards wellness and prevention, which falls in line with the healthcare reform plans.

In other words, wellness healthcare versus sick care, moving procedures from the hospital to the office to the ultimate care site.

Our strategies are solid.

We believe they are solid for many years to come, and we believe our medical group has been executing very well.

Of course, the Cardinal -- the acquisition of Cardinal physician business and the integration of those sales representatives, including adding the Cardinal product offering to our Henry Schein offering, have all contributed in one way or the other two driving, first, internal growth and in addition, of course, the acquisition growth that came along with that acquisition.

And, Bob, just the second part of your question.

So clearly, we show all of the Cardinal sales that came over to the Schein platform, both sales that were processed through the Cardinal platform, as well as the sales now being processed through the Henry Schein platform.

All of that is shown as acquisition growth.

So you can see there is also a significant acquisition growth in medical and, virtually, I think it is all related to the Cardinal acquisition of the physician business.

So we are able to track customer by customer and have a good split on that.

Okay.

Yes.

No.

Both sides were actually really strong.

Thanks for that.

And just a follow-up, Steve, you mentioned that you are working through the restructuring initiatives.

Just in that context, how should we think about the operating margin expansion next year relative to your goal of 20 basis points of same-store margin expansion per year?

So I think the goal is to at least achieve that 20 basis points.

There is potential maybe to be a little bit ahead of that depending on sales growth, and obviously the more sales growth that we get, if the markets continue to be solid for us, that allows us to leverage expenses to a greater extent.

So we feel good about the continued ability to expand margins into next year and even beyond.

Kevin Ellich, Piper Jaffray.

First, I wanted to go to the animal health business.

Steve, appreciated the comments on the normalizing for the agency direct sales switch.

How much did that affect the growth this quarter and when do you think we will see that come to an end?

You are talking about just the agency because there is two components to normalization, Kevin.

The first is the shift away from the IDX sales product line to Abaxis and Heska, and we take out both prior year, the IDX sales, as well as current year, the Abaxis and Heska sales to really show excluding all diagnostic product categories what the growth is.

That ends in Q4 of this year.

Separately, the agency sales switch was a negative impact of just under 3% for us in the current quarter.

It is hard to tell if there is future switches between agencies and direct sales.

We really can't predict that, but it is not something I can say is going to end or not end because it seems to be every year a flip-flop from one manufacturer from one to the other.

But we will continue to call it out because I do think the best way of looking at our real growth is adjusting the impact of agency sales conversions for our sales.

Sure.

Then, Steve, can you provide any color as to what products or what type of products were switched to agency this quarter?

It is in the pharma category, but I don't know the exact products, quite frankly, off the top of my head.

Okay.

Then, lastly, on the diagnostics switch to Abaxis and Heska, any color as to how that is going and which manufacturer seems to be getting more traction with the customers?

Sure.

I will start and Stanley will jump in.

So we continue to be very optimistic about the ability to drive sales for both product lines, Heska and Abaxis.

And one thing maybe I will turn into Stanley to talk a little bit about, we have launched the new software, Axis-Q, and maybe that is a good place, Stanley, for you to jump in.

Thank you, Steven.

We are actually quite pleased with the progress we're making on our diagnostic portfolio offering and, in fact, training of our sales force to introduce these products.

As you made a call, the switch from one manufacturer to this group of manufacturers came quite sudden.

We were focused on a lot of other things at the time and reliance on that manufacturer.

So about a year ago, we had to put our plans into place.

Our plans contemplated adding software, middleware that would commit various manufacturers systems to our software -- our practice management software, and about half the physicians in this country use our practice management software and a fair number overseas use our practice management software.

So we developed this middleware, Axis-Q, which is pretty good.

It is up and running.

It is out of beta, and we are selling.

Of course, our sales force needs to be trained and understand how the interface between the actual numbers, and there is a wide variety of boxes and systems out there.

There is no shortage of good technology out there, how we can connect that in the most effective way to our customers, our practice management system, also tying in our reference labs to our practice management system, and all this together with our acquisition of scil, which is a leading provider of laboratory diagnostic equipment and software, is working actually quite well.

And we are pleased just given the short amount of time that we have had to focus on this with the results.

Now, if you add the acquisition of Vetstreet to that, you will see that we are in a pretty good position to provide very good information to our customers to help them go out into their customer base, to ensure that they are attracting traffic into the practitioner's office and provide solid data to those manufacturers that wish to work with us on the pet food side and on the pharma side.

So we are very pleased with where we are considering what happened about a year ago, and I am quite sure, as has been the case several times in Henry Schein's history, where a similar situation has emerged that Henry Schein will thrive, and we will, in fact, be a significant provider of diagnostic equipment to veterinarians throughout the world.

Jon Block, Stifel.

Maybe the first one and I hope I have my numbers right.

Steven, for you, when I look at the updated 2015 guidance, obviously relative to our numbers, Q3 was a big beat.

I am just having a hard time tying out to the Q4 EPS number.

In other words, I sort of have my margins flattish year over year or adjusted op margins flattish year over year.

After you experienced some really good expansion in the first three quarters of the year and you have got the restructuring going on, so maybe you can help reconcile that.

Am I too high or internal?

Do I have the numbers right?

Any thoughts there would be very helpful.

Yes.

I don't want to get into that level of specificity with specific margins per quarter, but let me try to help you in a different way.

So there were a number of items, and I will go through a couple of them, that were timing impacts that were favorable, timing in Q3 that reversed, obviously, in Q4.

They include things like flu vaccines year over year.

Flu vaccine sales were much stronger, up 12% Q3 this year versus last year, and as you know, flu vaccine is a good margin product for us.

There is also timing of a number of expenses that were expected to hit and typically hit in Q3 that are now expected to hit in Q4.

And if you add all those together, you may have $0.03, $0.04, $0.05 of timing variances between Q3 and Q4.

So while that reduces a little bit of the growth in Q3, obviously it has the opposite impact in Q4, and when you do that, I think you'll be able to understand really more of the flow of our second half of the year.

So hopefully that is helpful.

Okay.

That certainly was.

Just one more question that may have two different parts.

I guess the international dental results, Stanley, were very solid, and it seems like consumables and equipment, as both now moving in the right direction, just at a high level, can you give us some commentary there?

I know you have had some ebbs and flows, but are you seeing the strengthening -- I guess broadening out in several countries, and how do you feel just about the consistency going forward in international dental?

Yes.

I think international dental business is solid.

Of course, you have to adjust with foreign exchange because our results in, of course, US dollars are not reflective of the dynamics -- positive dynamics we are experiencing.

I would say the German market, which is our business biggest market, is solid.

The equipment we are having is a very good year.

I don't see why we shouldn't continue with that trend for a while.

Consumables are steady.

The UK is a good market.

And I think we're doing okay there.

France is a bit weak, but we are doing okay because we are the only national full-service dealer distributor in the UK.

And then, if you look at Italy and Spain, we are doing okay, but the comparables are pretty low.

And then, the only other big market is Australia where there are -- we are doing okay getting some market share, but the Australian economy is not doing as well as it was maybe because of commodities, but I think it seems to be a little bit of a lackluster economy at this moment.

It can turn around quickly.

The rest of the markets, in aggregate, are not that material.

So we remain quite positive about international and dental, also (inaudible), and we will continue to invest in global dental market.

David Larsen, Leerink Partners.

Congratulations on a good quarter.

Can you provide me a little bit more color around the growth in dental equipment sales in North America?

It looked like a very healthy growth rate, especially relative to last quarter.

Yes.

It is something that, if you recall, last quarter we did say that we did expect to see an acceleration of equipment sales growth, so we are pleased that that happened.

If you look at overall, just to give you a little bit of color, traditional equipment sales growth for the quarter was a bit stronger than high tech equipment, but not much.

Probably somewhere in total of about 1 percentage point differential.

So really, good growth both on the overall high tech equipment category, as well as the overall traditional equipment category.

So not major variance, but slightly better traditional equipment growth than high tech growth.

Okay.

And then just a quick follow-up on IDEXX Labs, was that -- how much of a headwind was that in 2015 in terms of revenue, and have you fully worked through that and filled that bucket?

Thanks.

Yes.

So the IDEXX revenue in the prior year for 2014 was about $150 million of revenue, and we said we would not be back even on revenues in year one.

It will probably be at least a couple of years, maybe into the third year for us to be even.

It is a longer sales cycle to convert people.

Not all veterinarians are eligible for conversion in the same year because of long-term commitments, so it is a multi-year project.

So we are still negative on the diagnostic sales, but, again, long-term we feel, as Stanley talked about in the previous question, optimistic about being successful in that category.

Okay.

So if you get $150 million in revenue in 2014.

Did that convert to, say, $50 million in 2015, and then we will increase to like $100 million in 2016?

Yes.

I don't want to make those type of projections at this time as to how much it is.

I think it is too much specificity.

We typically don't give that level of detail on a specific product line.

But it is going to take two or three years, really, to get back to even on the sales line.

By the way, on the profit line, depending on how things work, we may not need the same amount of sales to achieve the same level of profitability because of maybe higher margin.

Congrats on a good quarter.

Michael Cherny, Evercore ISI.

Thanks for all the details so far.

I just want to dive back in a little bit to one of the earlier questions -- I believe it was Bob -- on the medical business.

Stanley, you did a great job talking about the strategic plan you had put in place in terms of repositioning your sales structure.

That being said, the last five quarters, if my math is correctly, on locally -- local currency internally generated revenue has really started to see the inflection point.

Is there anything else you can point to, is some of this related to ACA-driven utilization?

Obviously, you talked about Cardinal.

I'm just trying to get through the pieces because the step-up has been pretty meaningful and especially at the backdrop of against what I would say is less enthusiastic overall utilization metrics.

And so I am just trying to see how you guys are doing so much better than what the rest of the market appears to be doing.

It is a very good question and, obviously, there is no solid data out there.

There are a couple of factors.

First of all, there is definitely a movement from the acute care setting to the ultimate care setting, both in terms of physician practices -- and I am talking about GPs, although in some areas there are specialists, too, and the ambulatory care centers.

So that is a fact.

Specific data, hard to get.

But I think it is fair to say.

I think as the Accountable Care Act kicks in, there will be more people covered with the ability to go to a GP for a checkup or when they are feeling the flu or something, rather than wait until they are really sick to go to the ambulatory emergency center at a hospital where people who did not have insurance would have been treated.

I am not dealing with the very low end, which is Medicaid, nor with the Medicare or those that are covered by insurance.

But there is still, I don't know, 50 million, 60 million, 70 million people that in one way or another now will have some form of insurance.

Not fully kicked in, but GPs in general are seeing more patients.

They are not getting reimbursed, by the way, at the same rate per patient, that they were before, but they need a glove and they need a mask and they need cleansing solutions.

I will also add that there are not that many national distributors that could provide a complete solution to the alternate care setting.

I happen to think we do it better than anyone else, but I am sure others will say they do it well.

So we are gaining name recognition with the GPOs, and the GPOs realize that if the contract is put through Schein, they are not going to look too bad because we are going to execute well.

And I think we execute extremely well to these larger accounts, multiple locations under current management.

So it is a little bit of trend, and it is a lot of execution.

And I think we have good momentum in this marketplace.

A lot of brand recognition that perhaps we didn't have six or seven years ago amongst these large providers because six or seven years ago, we were known to the doctors, the person that managed the practice, rather than to the large group practice or the hospital or the IDN.

That is now our customer.

Thanks, Stanley.

Then, Steve, one quick technical question for you.

The euro has been all over the place over the last year.

Obviously, you talked about the headwinds you had related to EPS over the course of the year.

I believe you said currency was roughly in line -- at least the expectation for next year, call it, [110] or so, do you pursue any hedging?

Is there any thoughts given the volatility over the last 12, 18 months?

Do you do any hedging on the euro?

We actually took another look at it, given the volatility, and we continued to elect not to hedge translation adjustments.

That really is not an economic hedge.

It really, if you want a hedge for a long term period, is expensive, and you are just delaying the impact and so when the hedge runs out.

We do hedge, though, transaction exposure.

So in countries where we are buying in currency A and selling in currency B, we are continuing to hedge.

We actually increased the amount of hedges we do on transactions.

We were typically hedging 70%-plus of known activity.

We're probably closer to 90% today, but we really feel that the translation exposure is something that we don't want to do and, quite frankly, I think that the volatility and being able to predict movements is difficult, if not impossible.

Understood.

If I could sneak in one last question.

I apologize for this.

Is there an extra week next year included in the guidance?

Yes.

That is a good point.

Yes, we have our 53rd week in 2016.

I am glad you asked the question.

So it is interesting because depending on the business unit, the level of incremental profitability in some cases is modest and in some cases is actually slightly negative.

And that may sound odd, because you may say, how do you have an extra week and not have more profitability?

But if you think it through, it is the last week of the year, which is the holiday week.

So when you look at sales on consumables, sales tend to be very light that week.

Because a lot of offices are closed and there is not a lot of ordering going on that week.

Equipment is a little different story, but at least on consumables, it is a very light week.

And a lot of expenses -- and if you think of payroll and payroll related, that represents at least two-thirds of our expense structure.

You have a full week's worth of payroll and a partial week's worth of sales.

So everyone thinks the extra week is very profitable for us.

It really is marginally plus or minus depending on the business unit.

John Kreger, William Blair.

(inaudible) first percent growth in US.

John, sorry to interrupt you, but you -- the beginning of your question was not -- we were not able to hear.

So maybe you could just repeat it again.

Sure.

Sorry about that.

If you think about your US dental consumable growth rate of 3.8%, just hoping you could elaborate a little bit on any trends you might be seeing underneath that.

For example, growth in the sort of specialty procedures like implants versus the more GP-oriented procedures.

And related to that, are you starting to see any increasing shift of some of the more specialty procedures into the general dentist office or not really?

John, I don't think this quarter there's the indication of trends, per se.

Having said that, I do believe that more procedures are moving into the GP office, and that is why, by the way, we entered the endodontics space, the orthodontic space, and the implant oral surgery space in such a heavy way several years ago.

Because our GP customers are performing these procedures.

So I think that is correct.

I don't think any particular results that we have had may be indicative of the change.

If we are growing faster in the specialty area, it is probably the reason -- the reason is probably because we are underpenetrated.

So I would say in our numbers, there is nothing that could indicate one way or the other, or no, obviously, there is a movement from the smaller accounts to the midsize accounts and from the midsize accounts to the elite -- the large ones.

Although, we are experiencing, I think, the heaviest growth in the midmarket accounts.

Those are practitioners that owned a multiple of practices -- three or four practices.

Yes.

And just on the pure metrics for the current quarter, our overall specialty product category did grow a little bit faster than the overall 3.8%.

So that is part of our strategy and why we got into those product categories as we do expect them to grow at a faster clip.

It wasn't a huge gap this quarter, but, again, this is only one quarter and it was slightly faster.

Great.

Thanks.

Just one more last one, Steve.

Did the price component of the 2.8% change at all versus what you have seen in earlier quarters?

No.

I would say that pricing inflation for the year has been very stable.

I don't think there has been any major movements.

Jeff Johnson, Robert Baird.

Steve, I want to go back to one of your comments just on the dental equipment side.

You talked about the strength in basic equipment.

On the technology side, that side has been a little weaker this year.

I know you have had some tough comps throughout the year from last year with PlanScan and what have you.

But can you talk about maybe in the context of those tough comps and markets, maybe some of the innovation where your suppliers maybe on intraoral and that probably a little bit behind there?

But just kind of what is it going to take to get some of the technology side of the equipment business on the dental side growing here again?

Well, Jeff, mid-single digit growth on technology is not a bad place for the current quarter.

We are seeing on CAD/CAM a bigger increase of people electing, at this time, to just by the scan only product and not the full system.

As I am sure you know, we sell a few different brands on scan only, and sometimes that makes sense.

I think that is ultimately the practice.

I think we will go for the full end-to-end solution, but sometimes they just want to get started.

And so we are seeing a lot more people doing scan only than we have seen historically.

We did have a difficult comp with upgrades and very strong sales last year in the CAD/CAM segment.

But I still think, if you look out a few quarters, this is going to be a very strong category.

There is still very good technology.

There is still very low penetration in the market.

It is something that dentists really will adopt over a period of time.

And, again, we all know dentists are a little slower about this technology than other practitioners, maybe.

But I think we should stay very bullish on this category.

That is helpful.

I will just add to that.

The rates of ordination in the dental laboratories is accelerating a lot.

As the largest provider of products to dental labs, we are experiencing good growth in (inaudible).

So the whole area of CAD/CAM and automation of laboratories is very, very exciting for us.

And the connection between those labs and our customers through our Connect Dental program is very, very exciting.

Understood.

Thanks.

And then just maybe two very quick clarifying questions.

Steve, repurchases in the quarter, down under $40 million.

Second quarter in a row you have been kind of trending in the [mid-70s] for a number of quarters.

Just why, especially with the stock having pulled in during the quarter -- why the repurchases maybe lower two quarters in a row?

And then, any comments at all on timing of the dental consumables business throughout Q3?

One of your suppliers talked about maybe entering the quarter a little stronger than they exited.

But just anything you were seeing from a timing standpoint would be helpful.

Thank you.

Yes.

In hindsight, I wish we were a little bit more aggressive in Q2 and Q3 in stock repurchase, but we're still probably will use the bulk of the $150 million that is approved before the year-end or slightly into next year.

I am not sure there is any better answer to that, Jeff.

On Q3, on the dental side, I think I would concur that the quarter -- but don't read too much into this.

The quarter was stronger at the beginning of the quarter than the end of the quarter, but many, many times you see those variations and they really are just the ebbs and flow of purchasing patterns of practices and other timing things, and they are not indicative of really any trend.

But I do agree that it started stronger in Q3 than the final month of the quarter.

Thank you, everybody, for calling in.

Very pleased with the progress in the business.

In each of our businesses, we are gaining market share.

We are executing on our strategies and are very excited about the future of the business.

And so thank you for calling in.

If you have any questions, please feel free to reach out to Carolynne Borders at 631-390-8105 or Steve Paladino at 631-843-5915.

And look forward to speaking with you, I think, in 12 months.

A little bit longer.

Yes.

For the year-end, yes.

Thank you very much and have good holidays.

This does conclude Henry Schein's third-quarter conference call.

You may now all disconnect.