漢瑞祥 (HSIC) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein first-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, Diana, and my thanks to each of you for joining us to discuss Henry Schein's results for the first quarter of 2016.

With me on the call 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 shares, 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, May 3rd, 2016.

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 the call.

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

Thank you, Carolynne.

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

We are so pleased with our first-quarter financial results, and we believe we have gained market share in each of our business groups.

The global markets we serve remained generally healthy during the quarter, and although we face continued headwinds from currency exchange in our international business, the impact was far less than in 2015.

Looking at the bottom line, double-digit growth in adjusted diluted EPS represents a solid start for the year.

We also are pleased to affirm guidance for 2016 adjusted diluted earnings per share, which represents growth of 10% to 12% compared to the adjusted 2015 results.

We have made good progress across the board in all of our businesses in advancing our strategic plan.

The morale in the Company is great.

The Management team, I think, is well-positioned and focused, and with our change that we announced at the senior level, we think we are even more -- we are even better prepared to implement our strategic vision and are very, very excited about the future of the Company.

In a moment I'll provide some additional commentary on our recent performance and business accomplishments.

For the moment, I ask Steve to review our financial results and I'll be back in a few minutes.

Thanks, Steven.

Okay, thank you, Stanley, and good morning.

I am also pleased to report solid results for the first quarter of 2016.

As we begin, I'd like to point out that our 2016 first-quarter results include restructuring costs of $4.1 million pretax, or $0.04 per diluted share.

Also, our Q1 2015 results include restructuring costs of $6.9 million pretax, or $0.06 per diluted share.

We expect to continue to record restructuring costs through the second quarter of 2016.

I will be discussing our reports -- our results as reported and also on a non-GAAP basis, which is excluding those restructures costs in both periods as we believe the latter is useful for comparative purposes.

Exhibit B to this morning's news release reconciles our GAAP and non-GAAP income and EPS from continuing operations.

Turning to our results, net sales for the quarter ended March 26, 2016, were $2.7 billion, reflecting a 10.1% increase compared with the first quarter of 2015.

This consisted of 12.0% growth in local currencies and a 1.9% decline related to foreign currency exchange.

In local currencies, internally generated sales increased 9.3% and acquisition growth contributed an additional 2.7%.

I think it's important to note that when you normalize our sales for switches between agency sales and direct sales, our internal sales growth in local currencies for Q1 were 6.1%.

Again, you can note the details of sales growth that are contained in Exhibit A of our earnings news release that was issued this morning.

Operating margin as reported for the first quarter of 2016 was 6.5%, and contracted by 6 basis points compared with the first quarter of 2015.

However, when excluding restructuring costs, acquisitions completed during the past 12 months and also excluding the impact of switching between agency and direct sales, our adjusted operating margin expanded by 23 basis points compared to the first quarter of 2015.

Our reported effective tax rate for the quarter was 30.5%, and on a non-GAAP basis, excluding restructuring costs, it was slightly less at 30.4%.

This compares with 30.8% in the first quarter of 2015 when also excluding restructuring costs.

We expect our effective tax rate on both a GAAP and non-GAAP basis to be in the 30% range for the remainder of the year.

On a non-GAAP basis, excluding restructuring costs in both periods, net income attributable to Henry Schein was $116.8 million, or $1.41 per diluted share.

That represents increases of 7.7% and 10.2%, respectively, compared with the first quarter.

As a reminder, about 35% of our worldwide sales are based on currencies other than the US dollar and we do not hedge against that translation exposure.

Although foreign exchange impact was less than the prior year, it was still approximately $0.02 dilutive to our EPS in the current quarter.

I'll now provide some detail on our sales results for the quarter.

Dental sales for the first quarter of 2016 increased 4.1% to $1.3 billion.

This consisted of 6.1% growth in local currencies and a 2.0% decline related to foreign currency exchange.

In local currencies, internal generated sales increased 4.9% and acquisition growth contributed an additional 1.2%.

The North American internal growth in local currencies was 6.4% and included 4.6% growth in sales of dental consumable merchandise and 13.5% growth in dental equipment sales and service revenues.

Our consumable merchandise sales growth was highlighted by market share gains and higher sales to large group practices, dental service organizations and community health centers.

Our growth in equipment sales and service revenue reflected particular strength in high-tech equipment.

The international internal growth in local currencies was 2.3%.

That included 1.6% growth in sales of dental consumable merchandise and a 4.3% growth in dental equipment sales and service revenues.

Our consumable merchandise sales internationally was led by France, Australia and Spain, and growth in equipment sales and service revenue was led by Germany, France and Australia.

Our animal health sales were $771.4 million in the first quarter, an increase of 12.7%.

This included growth of 15.6% in local currencies and a 2.9% decline related to foreign currencies.

Internal sales in local currencies grew by 9.8% while acquisitions contributed 5.8% to growth.

The North American growth in internal sales in local currencies was 16.7%.

However, it's important to note that, that reflects a 7.4% growth when we normalize result to, again, account for the impact of certain products switching between agency sales and direct sales.

We believe this normalized growth rate is a more meaningful reflection of the ongoing performance of our North American health business and also reflects the strength of the broader animal health market.

Our international animal health internal growth in local currencies was 3.1%.

Turning to medical, our medical sales were $538.1 million in the first quarter, an increase of 21.3%.

This consisted of 21.5% growth in local currencies and a small 0.2% decline related to foreign currency exchange.

The 21.5% growth in local currencies breaks out between 22.3% growth in North America and 2% growth internationally.

Both of those numbers are internally generated.

When normalizing for the impact of agency sales under our strategic agreement with Cardinal Health, the North American medical internal sales growth was 11.2%, reflecting the fifth consecutive quarter of double-digit sales gains.

We believe we have been outperforming the medical market by a significant margin for the past five quarters as we have effectively capitalized on the growing market trend toward large group practices.

Technology and valued added service sales were $101.7 million in the quarter, an increase of 18.6%.

This included 19.9% growth in local currencies and a 1.3% decline related to foreign currency exchange.

In local currency, the internally generated sales growth was 7.5% and acquisition growth was 12.4%.

The 7.5% internal growth in local currencies consisted of 8.0% growth in North America and 5.1% growth internationally.

I think it's important to also note that through product upgrades, enhancements and strategic acquisitions, the advanced technology products and services we offer provide a platform for real improvement and efficiency in delivering of health care services.

There are also new sales opportunities and practice success across all of our business groups.

I'll talk about stock repurchase.

During the quarter we continued to repurchase our common stock in the open market.

Specifically, we repurchased approximately 664,000 shares during the quarter at an average price of $150.51 per share.

That's approximately $100 million of cash flow.

The impact on this repurchase in the first quarter to our EPS was less than $0.01 of accretion.

At the close of the quarter, we still had approximately $300 million authorized for future repurchases of our common stock, and we continue to believe our capital allocation strategy, which deploys a large portion of annual free cash flow to share repurchases and M&A activities, will continue to drive increased shareholder value.

I'll take a brief look at some of the highlights of our balance sheet and cash flow.

Operating cash flow for the quarter was negative $101.5 million.

That compares to negative $26.7 million in Q1 last year, but I think most people realize that first-quarter cash flow for us is typically negative due to seasonality and working capital during the quarter.

We continue believe that on a full-year basis, we will have strong operating cash flow for the year.

Our accounts receivable days outstanding was 42.1 days, which compares to 41.2 days last year.

Inventory turns was 5.1 turns this quarter, and compares to 5.3 turns last year.

I'll conclude my remarks by affirming our 2016 financial guidance as follows.

For 2016, 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 with the 2015 adjusted diluted EPS last year of $5.96.

Our guidance for 2016 adjusted diluted EPS is for current continuing operations as well as any completed or previously announced acquisitions, but does not include any impact for potential future acquisitions.

It also does not include the impact of restructuring costs, which are expected to be in the range of $0.10 to $0.13 per diluted share.

Also, our guidance assumes that foreign exchange rates will continue to be generally consistent with current levels.

Last, I'd like to remind you that we report our results on a 52/53-week basis ending on the last Saturday of December, so for FY06 we will have 53 weeks.

The extra week for us is in Q4 2016, but since that 53rd week is a holiday week at the end of the year and sales are usually lower than a typical week, the extra week does not materially add to our earnings, since fixed expenses remain relatively constant with that slow sales week.

With that financial review, I'll turn it back to Stanley.

Thank you, Steven.

Let me begin my review of our first business groups with dental.

We are quite pleased to report global dental internal sales growth in local currency of nearly 5%, with particular strength in equipment, which speaks to the overall health of the broader dental market.

From a strategic perspective, establishing Henry Schein in Japan has been a long-standing corporate goal.

Japan, after all, is the world's second largest dental market, and through two important investment positions, we are now well on our way in that important market.

You may, of course, recall that we established a presence in Japan in October 2014 with an investment at USA Dental Supply.

Late in the first quarter, we expanded our Japanese presence by partnering with J. Morita.

We have known J. Morita for many years.

They are one of the world's largest manufacturers and distributors of dental equipment and supplies, and we hold the company in high regard.

More specifically, we acquired a 50% interest in their One Piece subsidiary.

One Piece is composed of eight dental dealers located across Japan.

They serve approximately 6,000 dental clinics, and they had sales in FY15 of approximately $125 million.

We look forward to other Japanese dealers joining our partnership in the near future.

Japan has about 90,000 dentists and about 64,000 dental clinics, and with the additional of One Piece, we now serve approximately 20% of the market.

Also during the quarter, we signed an agreement to acquire a majority interest in Dental Cremer, a Brazilian distributor of dental supplies and equipment.

Brazil holds good potential for our dental group as well, and this investment builds upon our existing business there, which we established in 2014 as well.

I discussed Dental Cremer during our last quarter call and we look forward to closing this traction later transaction later this year.

Regarding our digital dentistry efforts, we are seeing strong growth in sales of our digital impressions solutions with our 3M, 3shape and PlanScan scanner offerings.

Henry Schein offers multiple brand of digital impression scanning solutions here in North America, and given our desire to promote an open architecture and provide dentists with innovative, robust and efficient choices for restorative dentistry, believe we have an excellent offering.

Of course, in Europe we do sell and we believe are the most significant distributor of the CEREC Sirona solution for CAD/CAM.

In addition, we continued to be well-positioned in the lab market on a global basis providing solutions for digital restorations that are outsourced to the lab facilities.

Last week Align Technology and 3shape announced that several of 3shape's digital scanners will be compatible for use with Invisalign case submissions later this year.

The two companies also announced an agreement to enhance digital work flow between iTero scanners and laboratory partners using 3shape dental software.

Like Henry Schein, this announcement makes clear that Align supports an open systems approach to digital impressions, and we are pleased to be advancing along the same lines.

Several months ago, we attended the Chicago dental society mid-winter meeting, which is an important trade show for our Company.

Among our many activities at this year's event, we introduced BruxZir NOW milling blocks system.

This system is compatible with the Glidewell TS150 mill, which will now enable practitioners to offer patients high-strength authentic zirconia restorations in one visit.

This system furthers our commitment to our expanding CAD/CAM product category here in North America and of course throughout the world and to the future of digital dentistry on a global basis.

We're very excited with the progress we're making on all fronts in our dental business in the core consumable business, the equipment business, the implant business, the other specialty areas, and of course in our CAD/CAM solutions in the dental office chair side and of course through our digital highway into the lab and our presence within the laboratory space, both in North America and abroad in Australia or New Zealand, Europe, et cetera.

I might add even now in Asia.

Let me now touch briefly on our animal health business.

As Steven mentioned, we're normalizing animal health results.

Our internal sales growth in local currency here in North America was 7.4%.

We're making good progress with our diagnostic product portfolio.

These products are typically sold under multi-year lease, and as those agreements come to an end, we're looking forward to adding even more diagnostic customers to our base.

Many of our customers have multi-year agreements in place, and I think that our team is very confident that our offering will be appropriate for the dental marketplace -- animal health market place here in North America and in Europe and Australia and New Zealand.

The diagnostic offering we have will be well-positioned to assume many of those leases as they mature.

We're also targeting large practices that may be seeking to purchase additional diagnostic instruments to handle their higher volume patient testing needs, whether it is machinery or the quick test disposable.

Early in the quarter at the North American Veterinary Conference in Orlando, we announced that Axis-Q command center software was available in the US for Abaxis and Heska systems.

This software links to our practice management software with diagnostic instruments.

We have received quite the positive response, excellent feedback from veterinarians who value the efficient and integrative work flow and revenue capture features offered by Axis-Q.

Our international animal health growth in local currencies during the first quarter was more than 13%, which reflects the positive contribution of a number of strategic acquisitions we have completed last year, many in Europe.

Again, we are very, very pleased with the progress we're making across the board, across the globe, with our animal health team.

Also, just like our dental team, great leadership focused on executing our strategic plan and doing a great job on the ground in each of the countries we're in but also advancing our strategic product offering that we are driving through our local distribution entities throughout the world.

Very, very pleased with the management and the progress that our animal health team are executing on.

Now, on the medical side, the reported growth in our medical group is impacted by agency sales in the prior year under our strategic agreement with Cardinal Health.

Yet, we're normalizing for this.

The core internal growth for the North American medical business was a robust 11.2% as, of course, Steven mentioned earlier on.

We remain highly optimistic about our ability to win new customers in the medical space.

We have completed the material components of the Cardinal integration, and they have experienced positive feedback from the customers that came along with this merger of the two physician businesses and the ASC businesses.

We continue to partner with Cardinal on combined proposals to large IDNs and have had a number of wins.

Finally, the Cardinal sales organization that came along with this merger on the physician side has been fully integrated and we continue to see expansion in our market share within the non-acute space.

Let me conclude a review of our businesses with an overview of the technology and value-added services part of the business.

We are generally pleased with the first-quarter performance of this business group, which includes the highest quarterly growth rate in North America in nearly two years with particular strength in software and financial services.

Early in the quarter, we completed the acquisition of a majority interest in Vetstreet, and a month later we acquired RxWorks.

Both transactions strengthened our position of leadership and add value to our customer base worldwide.

This is not just a US strategy on the animal health side but a global strategy, and we believe we have by far the largest installed base of animal health practice management systems, both in this country and on a global basis, being in a position to provide huge support to our customer base and also our manufacturing partners, who are seeking the information that we can provide as a result of these -- this installed base; in other words the data and the alignment with our sales organizations as we execute on aligned interests with our manufacturing partners.

As I discussed during the last quarterly call -- quarter call, Vetstreet is a leading domestic provider of marketing solutions and health information analytics.

We are particularly excited about the potential to pair our practice management software solutions with the Vetstreet data analytics capability.

Really, really exciting.

There's no one else in our industry, we believe, that has this capability to support not only information that will help the practitioners improve the operations and profitability and care they provide in their practices, as well as support the needs of our manufacturers, specifically on the pharmaceutical side, who are seeking to get their products to market.

RxWorks is a practice management software company serving veterinarians in Australia, New Zealand, the UK and the Netherlands.

RxWorks brings an installed base of more than 1,500 clinics, strengthens our growth practice management software business and complements our expanding animal health technology platform.

A moment ago, I mentioned the Chicago mid-winter conference.

Another one of our launches there was DEXIS for Dentrix Ascend.

This cloud-based imaging solution was built exclusively for Dentrix Ascend and helps to quickly capture and store images.

Doing so eliminates the need for additional digital imaging software and automates daily procedures such as insurance billing.

This software is initially available to users in North America and exemplifies our commitment to provide digital solutions that improve work flow and allow for better clinical care.

So much of Henry Schein's future is directly tied to our digital solutions.

That will help, of course, not only in the dental space, where we have imaging and prosthetic solutions that we are offering and will expand that offering in the near future and over the years to come in an exciting way, but the same kind of dynamics, intra-operability that exists as a huge opportunity in our animal health space and in our medical space.

Let me comment on some recent announcements of two new corporate positions that we have established the Henry Schein aimed at advancing commercial capabilities and, of course, driving growth opportunities.

Dave McKinley, the President of our Henry Schein Medical Group, has been promoted to the newly created position of Chief Commercial Officer for Henry Schein Corporate.

Specifically Dave will be responsible for the following four areas, global corporate marketing, working across the business to leverage Henry Schein's brand.

We have a great brand in four of our different business areas, and we'd like to capitalize on that to advance the overall brand of Henry Schein as a company focused on solutions to the office space practitioner in the dental, medical, and animal health space.

There are huge opportunities, we believe, to advance global product category management for the Company as a whole across the platform.

Then there are the technology initiatives, including customer solutions, e-commerce and business intelligence that we have in many, many parts of our business that we feel we can optimize and drive these technologies on a common platform throughout the Henry Schein organization.

Then Dave will take responsibility for certain specialty businesses.

Over the last decade plus, Dave has been with Henry Schein, he has made a significant contribution to the Company's success, starting with his initial responsibilities for leading our prosthetic business over a decade ago including the initial -- developing the initial business plan for E4D CAD/CAM products and Camlog.

Both of these products in the end, or actually today, are doing quite well for Henry Schein and Dave led the initial development of the business plan in the early execution of those business plans.

He also laid the foundation for what is currently our highly effective dental practice solutions management team on the dental side in Utah.

Dave has been at the forefront of driving change, effective change, at Henry Schein and making a real difference in our strategic platform.

We thank Dave for the terrific work he's done to date in the prosthetics field, in the practice solutions field, and of course most recently in the last seven years or so in developing, initially with Mike Racioppi and then with the senior -- the rest of the Senior Management team, our medical strategies, particularly our health care services group which is the group that services the large practices and then effectively executing on those plans, showing the tremendous results that we've experienced in the medical group over the last years.

Karen Prange, Senior Vice President at Boston Scientific Corporation, will join Henry Schein as the Executive Vice President and Chief Executive Officer of our Global Animal Health, Medical and Dental Surgical group.

This is a new group we've established within Henry Schein.

Karen will also be a member of our Executive Management team, by the way, as Dave will continue.

The Senior Management team who will support Karen's groups -- group are in the animal health area, Peter McCarthy, who will continue to serve as the President of our Global Animal Health group.

Peter, who joined Henry Schein about six years ago from a large pharma company, really created what is today a very, very successful international business for Henry Schein in Europe and Australia and New Zealand, and then assumed an overall leadership of our Animal Health group in the middle of 2015, has been a really major contributor to advancing our Global Animal Health platform results, strategy to develop those results that resulted in these terrific results.

Peter and his team are doing excellent work in our growing animal health business, which is showing, of course, excellent results and pursuing -- Peter and the team are pursuing many of the new and exciting opportunities both to expand our global presence and our unique product offering in the animal health space.

Brad Connett, also a Henry Schein veteran 20-plus years, has been promoted to President of the Commercial Group in the United States medical business, and Jeff Waldman, Chief Administrative Operations Officer for our US Medical Group, will take an additional functional responsibility for sales, operations and finance.

Brad has done a remarkable job in leading our sales and positioning in the medical market, a highly regarded executive in the medical space, and Jeff, also an executive of over a decade has been very, very -- has contributed in a very, very nice way in many parts of parts of Henry Schein on the financial and the operational side.

Both these promotions are reflective of Brad and Jeff's success in helping to drive growth in the Henry Schein medical business.

Renee Willi will continue to serve as President of our rapidly growing Global Dental Surgical group.

Renee, also a seasoned implant oral surgery executive, along with Steve Boggan, President and CEO of the highly successful by BioHorizons implant business, one of the fastest growing implant businesses of the world, and Michael Ludwig, General Manager of our Camlog German business, we are -- Michael has done a remarkable job in establishing the very important position of Camlog in Germany, and their teams have done yeomen's work in leading our implant business and positioning us, as Henry Schein, as one of the world's leading implant companies.

Karen has deep background in health care, extensive experience in managing large matrixed organizations, will be joining us in the middle of May.

Throughout Karen's career she has demonstrated an ability to bring people together, manage change, and grow businesses, a 17-year veteran of J&J, and most recently for the last four years or so at Boston Scientific.

We have created these new positions at a time when market technology and demographic forces are converging in one of the most unique ways, at least in my 35-plus years of Henry Schein, to create unique business opportunities for the Company.

We believe Dave and Karen's leadership will help us to capitalize on the significant opportunities before us, where I'm particularly pleased with a deep bench of management that we have in each of the three business units that we just discussed, the animal health area, the medical area, and of course the oral surgery area, implant area and related products.

I would also like to comment on some upcoming changes that we anticipate for the (inaudible) Henry Schein Board of Directors that are noted in our current proxy statement and we've voted on at our March -- at our May, sorry, 31st annual meeting of stockholders.

We have proposed the addition of two new directors to take the seats of two long-serving directors who will be retiring from our Board.

The retiring directors, Norman Matthews and Dr. Lou Sullivan, both have helped guide Henry Schein through a period of unprecedented growth and change.

Norman has been a director since 2002, an experienced professional director who has enormous credibility in the marketplace and contributed in a significant way to Henry Schein's growth for almost 14 years.

Dr. Sullivan, the former Secretary of Health, similar track record.

Dr. Sullivan joined us, our Board, in 2003.

Both Norman and Dr. Sullivan have been a part of Henry Schein's successful journey over the past decade from a time when the Company served only dental and medical customers.

I think our sales in the 2002/2003 time frame was something like $2.8 billion.

At the close of 2015, its sales were up nearly four-fold to the $10.6 billion, and of course we now serve animal health practitioners on a worldwide basis.

In fact, animal health sales in 2015 were more than our Company's entire sales at the time Norman Mathews joined our Board.

I could go on at length about the contributions and character of both Dr. Norman Matthews and Dr. Sullivan.

Instead, on behalf of my colleagues at Henry Schein, my fellow Directors and of course our shareholders, we simply say thank you for your contribution.

You have both contributed in a significant way to creating significant shareholder value for the Henry Schein shareholders.

We are fortunate to have two director nominees on the proxy who will bring excellent and complete complementary skills to our Board.

The first is Joseph Herring, whose career in healthcare spans more than 35 years.

He served as CEO of Covance for more than a decade, up through the acquisition by LapCorp about a year ago.

Early in his career, Joseph held very senior leadership positions with Kmark International and American Hospital Supply.

Upon his election to the Henry Schein board, Joe will bring to Henry Schein comprehensive knowledge on pharmaceutical, management, sales and of course guiding a fast growing -- experience in growing fast growth companies.

Kurt Kuehn is our second Board nominee.

Kurt's spent his entire career at United Postal Services and served as the UPS CFO for eight years through his retirement last year.

At UPS Kurt also had leadership roles in sales and marketing, engineering, operations, and strategic cost planning.

Clearly Kurt is an expert in distribution logistics as well as corporate finance and accounting and was part of the UPS successful transition from a pure transportation company to a logistics company that has enormous array of value-added services.

We look forward to many -- to the many talents he will bring to Henry Schein and so welcome Joe and Kurt to the proxy and trust they will be elected overwhelmingly in May.

With that commentary and overview of the quarterly financial operating performance, there just isn't the time today to go through all the exciting items that are being dealt with at Henry Schein across the board.

The Company is making advances on so many fronts in so many exciting ways.

Now, operator, we're ready to take some questions.

(Operator Instructions)

Your first question comes from the line of Dave Francis, RBC Capital Markets.

Good morning, Stanley and Steve.

Thanks for all of the commentary.

Two quick questions.

First on the dental side, Stanley, can you comment on the strength of the equipment sales that you guys have been experiencing?

Is there something going on in the market beyond just general strength and confidence of your practitioners in terms of driving the high-tech and other equipment sales?

Or is there something structurally from a tax or other perspective that's impacting the demand side of the market there?

Yes, Dave, good question.

Generally I think dentists are feeling good about their practices.

I think there is stability in patient visits and I think dentists are understanding that investing in newer technology provides for better quality dental care, a better experience for the customer, and actually results in a more profitable practice, of course combined with quality of care.

I would say it's driven to a large extend ever tent by extent of some of the newer technologies in the imaging side, on the prosthetics side.

We have a very good offering today of products that match the needs of the marketplace.

We add the A-dec line in North America, which is contributing.

Having said that, I think our sales across the board, even with the existing portfolio of traditional equipment, has been good.

Overall, it's good dynamics in the marketplace in terms of the dentists feeling good, the newer technology available, and a little bit the result of us expanding our offering with the A-dec product line.

But I wouldn't put that much emphasis on that.

That is, A-dec is doing well with us, but it's also a relatively small part of the entire equipment portfolio.

But it is doing well.

I would just add one other thing, Dave.

Specifically, the CAD/CAM category was very strong for us in North America, and as we mentioned on the last call or two, for us CAD/CAM is not just selling complete end-to-end units.

We also sell a number of scan-onlies and we're seeing strong growth in the scan-onlies, which for us, we think, is very positive in the initial sale but also positions the customer to come back to us in the future when they're looking to do chair-side milling and they can then buy the additional component at a later date.

CAD/CAM, that's the total category of complete systems and scan-onlies, was very strong for us.

It truly was across the board, because traditional equipment as well as high-tech was both strong.

That's helpful commentary.

As a quick follow-up, on the medical side of the business, obviously strength there but wanted to follow up relative to your relationship with Cardinal Health.

Cardinal just signed a large relationship with Kaiser Permanente and was wondering if you guys participated with them on the outpatient side and if you could give some other more tangible examples of where you guys are participating on a joint bid basis.

Thanks.

On Cardinal in general, our relationship is advancing.

As we mentioned, the physician business is integrated, working well and so is some of the-- and we also have assumed a business in a number of ASCs that Cardinal's physician sales force was servicing.

The majority of Cardinal's physician-related ultimate care customers have transitioned to our platform and we are working together on a number of IDN sales opportunities.

We've actually generated some very nice sales together.

The particular situation, or the particular opportunity with Kaiser that Cardinal has -- the business they have won, is less in our wheel house than the business we undertake day to day.

I believe that is more of a bulk distribution arrangement and Cardinal is handling that from the distribution system.

That is not exactly the kind of business we anticipated working on together, but there are many, many ideas that we are working on together and actually have landed quite a bit of business in that regard.

Great.

Thank you.

Your next question comes from the line of Brandon Couillard at Jefferies.

Hi, good morning.

This is [Sajin] for Brandon.

Just a question on cash flow.

Given the 1Q dynamic, will you provide us an update on your free cash flow expectations for 2016?

What sort of conversion are you factoring into for your projections?

Sure, again, although it was negative cash flow for us for the quarter, if you look at the components, it was really driven by working capital, which is typical for us in that typically inventory purchases in Q4 are higher for a number of reasons, and the payments for those inventory purchases occur in Q1, so that's what drives it.

But on a full-year basis we're still looking at growing our operating cash flow, probably consistent with our bottom-line growth rate, our net income growth year over year, so we still believe we can generate strong cash flow on a full-year basis with some growth similar to our bottom-line growth.

We did also have during the quarter a little bit of duplicative inventory and in consolidating some warehouses in Europe, specifically Germany.

Over the balance of the year, that inventory level will come down.

We did that as precautionary measure as we're moving and consolidating distribution centers in Germany.

We typically have inventory, excess inventory that we managed through over the next few months.

Again, we still feel that operating cash flow will continue to be strong and grow over the prior year.

Got it.

Thanks.

Your next question comes from the line of Ross Muken of Evercore ISI.

Good morning, gentlemen.

It seems like based on obviously the growth rates in your commentary, share is moving still positively in your direction.

I mean, I guess on a sequential basis or on a trending basis, is there any of the business segments where you're seeing a materially more positive shift than others and if so, I guess what is the key driver of that?

Well, I'm not sure that we can say that there are materially -- material improvements over the last quarter or two.

It's really more gradual improvements.

You can see, again, that the US medical business was our strongest grower.

It was the fifth consecutive quarter of double-digit sales growth.

That's a strong number.

We would like just for that to continue.

I don't think acceleration there is something that we can expect, but we do expect that for the foreseeable future that we can continue to put up high-single to low-double-digit sales growth.

I think we're pleased that across all of our businesses and all of our markets, we think patient traffic has been healthy.

US dental patient traffic has been healthy as well as even in the European markets, although not in every market, but as we said in the prepared comments, even markets like Spain, that over the last year or two had some challenges in market growth, was a strong grower for us.

I think we feel like the overall markets are continuing to cooperate.

We do believe that there's the potential for some very modest continued gradual improvement in underlying market conditions.

We're happy with the overall with the 6%-plus constant currency growth that we achieved as a Company.

Makes sense.

Maybe just on M&A pipeline.

I mean, obviously you guys are regular buyers of tuck-ins but I guess a lot of volatility in public markets.

You typically trade in the private markets.

Any change in willingness of sort of smaller private owners?

Are you seeing more assets come to market, any one segment versus another or is the funnel pretty consistent?

Ross, the deals we do and have actually done in the past 20 years and even before we went public, are really not is much dependent nor actually related to specific financial market conditions.

What drives our deals is generally the synergies that -- and the interest of potential sellers and potential partners to work with Henry Schein to advance their business for particular family reasons, management reasons, shareholder reasons, et cetera, and so the pipeline is as full as ever.

Of course there's no guarantee as to when we can close a deal.

Deals with us often take many years from the time we start talking to people to the time we close, and there's not much that's related to the financial markets per se, so we remain quite optimistic that we'll continue with our internal growth and supplement the growth with acquisitions.

We have committed that we will use our cash flow in three ways.

One is to buy shares.

One is to invest in the business, although investing in the business sometimes is not as important from a cash flow point of view because we're a net generator of cash, but we nevertheless do invest in the business some of the cash flow but it's essentially from the buying of stock and the investment in acquisitions and we continue to expect that trend to continue as it has for years now.

Excellent.

Thank you.

Your next question comes from the line of Jon Block of Stifel.

Hopefully I can slip in two questions.

The first one, just Stanley, over the past year and change you've made some interesting acquisitions in VetSkill, Vetstreet, et cetera.

Can you just talk to the positioning of the North American animal health business sort of 18 months after IDEXX going direct?

In other words, can diagnostics still sort of be accretive to your overall North American vet growth rate with sort of the products and positioning that you currently have on hand?

And then I've got a follow-up.

Thanks, guys.

Yes, so let me start a little broad and then get specific.

Our animal health strategy encompasses two major focuses.

One is to advance geographic presence throughout the world.

Wherever there's a middle class that is interested in pets, we like to be there and selectively in the production side but very, very selectively.

It's not necessarily where the largest markets are but there are opportunities.

For example, we do a good job in Derry in Ireland, and New Zealand.

It is those kinds of opportunities plus some opportunities in equine.

We want to get a large geographic footprint, and then we want to focus on a couple of things.

First is pharma market share around the world and in that connection, we work with the large pharma companies but also some of the generic companies, too, is we want to find unique products to put through these channels.

In that connection, there are opportunities in the areas such as instruments where we acquired a company veterinary instrument several years ago and are taking their products around the world and doing quite well with that.

The second is in the area of med-surge products.

We acquired KRUUSE out of Scandinavia.

They do business in about 100 countries and we're advancing their product offering and their market share throughout the world and particularly through the Henry Schein channels.

The third is equipment, and in that area we include diagnostics.

Equipment include, of course, imaging equipment, surgical equipment, and the diagnostics.

Under that category is also some disposable diagnostics.

Diagnostics in particular tie into the third area, which is the area of software and interconnect -- the connectivity between software and devices and big data.

We've been investing in all those areas, not only in actual software providers such as VetRx and the other companies we acquired in the last four or five years, and today we have the largest installed base of practice management software in a number of countries, including the US, where over half the veterinarians are using our software.

It's the installation software and data, and in that connection we invested in Vetstreet last quarter and we have a number of other opportunities to capitalize on data.

(Technical difficulty) Axis-Q to the reference lab and of course to the diagnostic machinery.

Bottom line is, if you're asking about how we're doing specifically in North America, which is where you refer to a particular company not wishing to do business with us anymore, we actually had a very good first quarter, not only in the products we represent, the Abaxis and the Heska product, but also with the Skill product offering, the Company we acquired in Europe that has a line of connectivity products and its own products.

We're doing quite well in the diagnostic space in North America and by the way, in Europe as well.

It's a broad strategy of geographic penetration and product penetration in terms of pharmaceuticals, the specialized areas that we've acquired a presence in, and the technology area.

Very helpful and salient.

And then just a second question on dental, specifically international dental equipment.

Maybe if you could comment the near-term pipeline just because your going up against that really solid number from IDS in June 15?

Lastly just any plans to validate PlanScan for Invisalign?

You mentioned the inter-operatability.

The other scanners that you're our there selling, 3M and 3Shaper, are both validated.

Thanks for your time, guys.

I think for PlanScan, we'll have all the appropriate connectivity.

It's just a matter of time.

Actually, we believe the PlanScan, the actual scanner is pretty good, but we are open architecture and we promote the 3M product, which is very good, backed by a world class company.

3Shapes, which is high-tech, really on the edge of new technology, and the Planmecca company, which has great products, also in the space.

We've got three and we are likely to add more scanning products over time.

I think all of these will be connected in one way or another to all of the major applications.

Perhaps there will be one big company that is not so open to open architecture, we don't know, but we are very much pro architecture.

Have always been at Henry Schein.

We are delighted to carry any product that any quality manufacturer has whether its in consumables, equipment in high-tech and have always been pro competition and open to open architecture.

That's been the hallmark of Henry Schein since Henry opened the door and sold the first generic drugs in this country many, many years or decades ago.

We are comfortable with our offering for the dentists and for the dental laboratory.

We think we're making good progress in this country and abroad, and we see a huge opportunity for the digital space and had a very good quarter both in the full systems globally and in the scanners globally, and are very excited with the opportunity in the dentists office and in the laboratory.

Yes, let me just answer the second part of your question on equipment backlog.

In North America, our equipment order backlog versus same time last year is up.

It's up single digits, so that's good.

We feel given the strong growth we had in Q1 of 13% equipment growth having the order backlog also increase is good, but not surprisingly in international, the order backlog is a little bit down.

That's -- I think you have to remember that last year was an IDS year.

This year was not an IDS year, so we feel good about the equipment backlog internationally given that it's not an IDS year but it is a little bit lower than the prior year at the same time.

Perfect.

Very helpful, thank you.

We have one final question coming from the line of Jeff Johnson.

Good morning.

This is Jason actually on for Jeff.

Thanks for taking the questions.

Just a couple for Steve, first on the revenue side.

Some very good growth rates in animal health and medical, even after normalizing for some of the agency device by sell shifting we saw this quarter, but hoping you could help us with how we should be thinking about the to- line contributions from this shift over the balance of the year.

Do you expect a similar benefit as to what you saw here in 1Q?

The follow-up to that question would be how should we be thinking about the operating margin progression for the rest of the year in light of these moving parts of the top line as well as what seemed to be maybe a step up in stock comp here to start 2016?

Sure, so first on the sale side, we should see on the medical side the normalized sales growth continue at a very healthy rate.

I said earlier normalized somewhere in the high-single to low-double-digit range is what we think is achievable.

We should see the impact of the agency sales shift related to the Cardinal transaction decrease in Q2 and virtually go away beyond that.

Similarly, on the animal health side, we would see the growth that we experienced, which was 7% and change, we'd like to see that continue.

There might be a little opportunity for acceleration there, and the agency shift will probably continue for the next few quarters.

With respect to operating margin, the goal is still to get operating margin expansion for the full year.

We typically don't see much of it in Q1 for a number of reasons.

Again, stripping out some of those unusual items, we did get 23 basis points of margin expansion in Q1, but we expect to get further operating margin expansion for the full year.

I'm trying to remember, Jason, there was a third part to your question, but I'm not sure I remember it.

Yes, I think you actually -- you hit on most of that there.

Actually one follow-up, if I could.

The North American symbols performance pretty solid but it did slow again still.

We saw last quarter, last quarter maybe just a bit above normal or maybe we took back down in 1Q but just how -- I know you mentioned it in prepared remarks, that the market's still pretty solid but how would you qualify end markets at this point?

Are we seeing any softening versus 4Q or are things still pretty stable and solid?

Maybe any color you could provide on April would be helpful as well.

Thanks.

Jason, I think the markets for dental consumables are in the couple of hundred basis point growth.

It's not much more than that at this stage, maybe a little bit more than 200 basis points.

It depends, again, on the mix.

In some areas are growing faster than others, maybe picking up a little more market share here and there.

I think it is safe to assume that we're growing around twice the market rate, around that number and the markets have been pretty stable for quite a while in North America.

Okay.

Thanks so much.

That's helpful.

Just specifically, patient traffic, as we said earlier, continues to be healthy and that's more than just a dental comment.

That's a dental and medical and an animal health comment, both domestically and internationally.

Okay.

Thanks guys.

Okay.

There are no further questions at this time.

Okay.

Thank you, operator, and thank you, everybody, for calling in.

We did promise to end at 11.

We're six minutes late.

Sorry, but I wanted to handle the last question and sorry for others that wanted to ask and we were just not able to accommodate, but please feel free to call Carolynne Borders, our Head of Investor Relations at Henry Schein.

What's the number?

843?

It's actually 631-390-8105.

Or Steven Paladino at 631-843-5915.

I remember the number.

Thank you all for calling.

We are quite optimistic about the markets that we're in, about Henry Schein's strategy, long-term strategy.

We think we're executing well on our strategic plan.

We're right in the middle of the 2015, 2016, 2017 strategic plan.

I think we've positioned our management team well.

We've made some changes that are really part of (technical difficulty) progression in advancing our effectiveness as a team.

We're very pleased with the heads of all of our different business units, all executing well.

The dental team, led by Jim Breslawski, is doing a very, very good job as well and has for decades now.

Overall -- and Jim Harding, our Chief Technology Officer and the software businesses all operating well.

Of course, there's no business that doesn't have challenges.

We have challenges, and we're dealing with them, but the opportunities are exciting.

Each one of these areas is full of -- chock full of ideas, change, opportunity to take advantage of the change, the demographics, technology, the markets we're in.

We're very, very excited about our future and where we're heading.

Thank you for your interest, and we'll be back in 90 days.

Thank you for participating in today's Henry Schein first-quarter conference call.

This concludes today's conference.

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