漢瑞祥 (HSIC) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Henry Schein's second-quarter conference call. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Carolynne Borders, Henry Schein's Vice President of Investor Relations. Please go ahead, Carolynne.

Thank you, Sylvia, and thanks to each of you for joining us to discuss Henry Schein's results for the second quarter of 2016. 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 that is forward looking. As you know, risks and uncertainties involved in the Company's business may affect the matters referred to in forward-looking statements. As a result, the Company's performance may differ from those expressed in or indicated by such forward-looking statements.

These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission. In addition, all comments about the markets we serve, including growth rates and market share, are based upon the Company's internal analysis and estimates.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 4, 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 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 that we have allotted for this call.

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

Thank you, Carolynne, and good morning, everyone. Thank you for joining us. I will provide further information, further color on our performance during the second quarter, expectations for the rest of the year, after Steven provides the specific information on our performance in the second quarter.

Generally, though, our North American dental sales were a little bit below our expectations in the second quarter. However, sales in our medical, animal health, technology value-added services businesses were strong, as well as in aspects of our North American dental business, and we will again provide further color on specifics after you have the details from Steven.

Over the years, our business has been quite predictable, and as an organization, Henry Schein has been able to adapt, seize opportunities, and address challenges. We believe that our business model and strategic plan, including our continued investments, will drive our growth over the long term and, in fact, in the medium term, and we remain extremely well positioned in each of our vertical markets we serve not only to gain market share, but of course to manage our investments very carefully. We have a seasoned management team that is very good at these points and particularly at gaining market share and managing our investments in a very strategic way.

On a granular level, looking at plans for the UK to leave the European Union, they are on a very early stage, and what is -- which is likely to be a two-year process; many say not much thoughts until early next year. Surely there will be developments along the way, but let me be clear that Henry Schein's commitment to the UK remains unchanged and so does our commitment to the European Union. We continue to believe that the UK and Europe on the whole represent attractive long-term opportunities in both our dental and animal health businesses and perhaps even in our medical business in the long term. We expect to continue to execute well in our value-added customer approach, just as we did before the Brexit vote.

In a moment, I will provide, as I said, additional commentary on our recent business performance and accomplishments, but first Steven will review the specifics around our financial results.

Okay, thank you, Stan, and good morning to all. As we begin, I would like to point out that our 2016 second-quarter results include a favorable proposed tax settlement of $4.5 million or approximately $0.05 per diluted share.

Q2 2016 results also include restructuring costs of $20.4 million pretax or $0.18 per diluted share. Our prior-year Q2 2015 results also include restructuring costs of $7.2 million pretax or $0.06 per diluted share.

I will be discussing our results as reported on a GAAP basis and also on a non-GAAP basis, which excludes those restructuring costs, as we believe the non-GAAP financial measures provide investors with useful information about the financial performance of our business, enable comparisons of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to the key metrics used by management in operating our business.

These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. You can see our Exhibit B to this morning's earnings release that provides a reconciliation of GAAP to non-GAAP results.

So turning to our results, net sales for the quarter ended June 25, 2016, were $2.9 billion, reflecting a 9.3% increase compared with the second quarter of 2015. This consisted of 9.7% growth in local currencies and a 0.4% decline related to foreign-currency exchange. In local currencies, our internally generated sales increased 7.6% and acquisition growth contributed an additional 2.1%.

Also, when further normalizing the switches between agency and direct sales, our internal sales growth in local currencies for the Company for Q2 was 5.8%. You can see the details of our sales growth that are also contained in today's earnings news release on Exhibit A.

If you look at the operating margin on a GAAP basis for the second quarter of 2016, it was 6.3% and contracted 67 basis points compared with the second quarter of 2015. The increase in restructuring costs in the second quarter of 2016 versus the same period last year negatively impacted the contraction by 43 basis points. Acquisitions completed in the past 12 months and related expenses, as well as the switches from agency to direct sales, also combined to negatively impact our contraction by 9 basis points.

The remaining contraction was primarily driven by lower-than-expected sales growth in our North American dental business relative to our other businesses.

As a result of this, we have extended our restructuring period to the end of 2016 in order to continue to reduce our cost structure.

Our reported effective tax rate for the quarter was 27.6%. On a non-GAAP basis, excluding restructuring costs, our effective tax rate was 27.4%. This compares with an adjusted effective tax rate of 29.8% for the second quarter of 2015 when also excluding restructuring costs.

As I mentioned earlier, our tax rate this quarter reflects approximately $0.05 per diluted share related to a favorable proposed tax settlement. We also expect the settlement to reduce our ongoing effective tax rate going forward. More specifically, we anticipate that our effective tax rate on both a GAAP and non-GAAP basis to be in the 29% range for the remainder of the year, and previously we had guided that effective tax rate to be somewhere in the 30% range.

If we look at net income attributable to Henry Schein on a GAAP basis, it was $120.1 million or $1.46 per diluted share, representing increases of 1.8% and 4.3%, respectively, compared with the prior year. On a non-GAAP basis, excluding restructuring costs in both periods, our adjusted net income attributable to Henry Schein was $135.4 million or $1.64 per diluted share, and that represents increases of 9.9% and 12.3%, respectively, compared with the prior year.

Foreign-exchange impact on diluted EPS for the quarter was not material. I would also like to note that at current exchange rates we expect the foreign-exchange translation of our outside of the US earnings to negatively impact our diluted EPS in the second half of the year by at least $0.02 per diluted share, and that's related to the recent strengthening of the US dollar versus the British pound sterling.

Let me now provide some detail on sales results for the quarter. Dental sales for the second quarter of 2016 increased 4% to $1.4 billion. This consisted of 4.1% growth in constant currencies and a small 0.1% decline related to foreign-currency exchange. In local currencies, internally generated sales increased 2.8% and acquisition growth contributed an additional 1.3%.

Our North American internal growth in constant currencies was 2% and it included 1.8% growth in sales of dental consumable merchandise and 2.7% growth in dental equipment sales and service revenue.

As we noted in our press release, our Q2 dental sales in North America reflect softness that began in early June. Our performance was also impacted by a decision to stop selling certain precious metals products. These products have a very low gross margin and are relatively immaterial to our profitability. Precious metal sales negatively impacted our North American dental merchandise sales growth in Q2 by approximately 50 basis points, so again if you -- our growth would be 50 basis points higher without the decision to stop selling precious metals. This will continue to impact our merchandise sales growth until it annualizes, so it will continue for the next three quarters.

As Stanley mentioned, we are extremely well positioned among our dental customers and we will continue to invest in opportunities that we believe will drive our growth over the long term.

Looking at international internal growth in local currencies, our dental group was 4.2% growth and included 4.5% growth in sales of dental consumable merchandise and 3.1% growth in dental equipment sales and service revenue. That growth internationally was driven specifically by Italy, France, and Spain to a large extent.

Animal health sales were $853.6 million in the second quarter. That was an increase of 14%. This included growth of 15.2% in local currencies and a decline of 1.2% related to foreign-currency exchange.

Our internal sales in local currencies grew 11.8% and acquisitions contributed an additional 3.4% to our growth.

Looking at the North American animal health sales, internal sales growth in constant currencies was 18.8%, and when normalizing the results to account for the impact of certain products switching between agency and direct sales, our growth was 11.4% in North America. We believe this normalized growth rate is a more meaningful reflection of the ongoing performance of our North American animal health business and also reflects the strength of a broader animal health market.

Our international animal health sales growth internally in constant currencies was 4.9%.

Looking at our medical group, our medical sales were $538.8 million in the second quarter and that was an increase of 14.4% (sic - see Press Release - "14.5%"). Foreign exchange had virtually no impact on our sales growth. That 14.5% growth included 14.9% growth in North America and 2.4% growth in local currencies internationally.

Again, when normalizing for the impact of agency sales in the prior year, North American internal growth was 10.4% and this is the sixth consecutive quarter of double-digit sales gains for our North American medical business. So, indeed, we have been outperforming the medical market by a fairly significant margin for the past six quarters and we have effectively capitalized in the growing market trend towards larger group practices, including IDNs, or integrated delivery networks.

Our technology and value-added services sales were $107 million for the quarter, representing a 19.6% growth. This included 20.4% growth in constant currencies and a 0.8% decline related to foreign-currency exchange. In local currencies, the internally generated growth was 8.1% and acquisitions contributed an additional 12.3%. The 8.1% internal growth in local currencies included 8.5% growth in North America and 6.4% growth internationally.

I would like to highlight that our North American sales growth included more than 20% growth in our financial services business. Our financial services business includes equipment and practice financing, credit card processing, practice brokerage, and patient collections, as well as other services.

Our core software products and upgrades of technology and value-added services businesses also aims to provide customers with solutions that are efficient and patient friendly, allowing them to generate more business, manage content among multiple sites, and improve the overall practice management.

During the quarter, we continued to repurchase our common stock in the open market. More specifically, we purchased 337,000 shares during the quarter at an average price of $169.41, and that represented about $57 million. The impact on the current quarter of that purchase was immaterial to our EPS.

I think it's important to note at the close of the quarter we had approximately $243 million authorized for future repurchases of common stock, and we continue to believe that our capital allocation strategy, which deploys a large portion of our annual free cash flow to share repurchases and M&A activity, will continue to drive increased shareholder value.

If we look at some brief highlights of our balance sheet and cash flow, we had very strong operating cash flow for the quarter, $274 million, compared to $207 million in the prior year, and we believe we will continue to have strong operating cash flow for the year.

Accounts Receivable days outstanding was 40.8 days this quarter, compares to 39.3 days last year. Inventory turns for the quarter were 5.6 turns and that compares to 5.8 turns last year.

Let me conclude my remarks by discussing our 2016 financial guidance. We are revising our guidance due to the impact of a number of factors. These factors include the ongoing business and economic uncertainty related to the Brexit vote, which would have a potential impact on the UK, as well as the rest of Europe. As noted earlier, given the recent strengthening of the US dollar versus the pound sterling, at current exchange rates we expect foreign-exchange translation to negatively impact our diluted EPS in the second half by at least $0.02.

And this new guidance also includes a cautious view of the North American dental market.

So for 2016, we now expect adjusted diluted EPS attributable to Henry Schein to be $6.55 to $6.60, which represents growth of 10% to 11% compared with the 2015 adjusted diluted EPS of $5.96. All of these adjusted diluted EPS numbers exclude restructuring costs. And this compares to our previous guidance, which was $6.55 to $6.65.

Our guidance is presented on a non-GAAP basis only, given that the Company cannot reasonably project the restructuring costs that we expect to incur in the second half of 2016. For the same reason, the Company is unable to address the probable significance of that information. Our guidance for 2016 adjusted diluted EPS attributable to Henry Schein is, as always, for continuing operations, as well as completed or previously announced acquisitions, but does not include the impact of potential future acquisitions, as well as restructuring costs.

We now anticipate that the restructuring initiatives will continue into the second half of the year as we continue to reduce our operating costs in light of some of these market conditions. At this time, again, we are not able to provide estimates for this impact in our 2016 financial results.

Specifically for Q3, we expect our growth in adjusted diluted EPS, again excluding restructuring costs, to be in the mid-single digits, so mid single-digit growth for Q3, but we obviously expect the growth to accelerate in Q4.

This guidance also assumes foreign-exchange rates are generally consistent with current levels as of now. However, we do believe that there is a possibility that the US dollar may continue to strengthen, and remember that 35% of our worldwide sales are in currencies other than the US dollar.

Also, I would like to conclude by mentioning that our fourth-quarter results, since we are on a 52-/53-week basis, ending on the last Saturday of December, include an extra week. So 2016 consists of 53 weeks. The extra week is in Q4 of 2006 (sic) and it is the last week of our fiscal year, which is the holiday week at the end of the year, so sales are typically lower during that week and we typically don't have the same level of profitability because of fixed costs remaining relatively constant.

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

Thank you, Steven. Let me begin my review of our four business groups with dental.

As Steve noted, North America dental sales were impacted by softness in the US that began in early June. We believe the strength of our relationship with our customers and our commitment to delivering value to their practices will continue to be key to our long-term success and, as in the past, will enable us to continue to gain market share not only in the United States, but globally in the dental market.

Although the sales growth was lower than expected in the second quarter, we believe we have a proven and successful model of delivering value-added solutions to our customers and we have increased our focus on delivering better sales results in the short term.

As evidence of this commitment, during our second quarter we announced an investment in Custom Automated Prosthetics, known as CAP. CAP is a US digital laboratory supply company with 2015 sales of approximately $30 million. They offer CAD/CAM equipment, as well as a full line of zirconia materials.

The integration of CAP with Zahn, which is our dental laboratory business, and our custom milling center furthers our commitment to providing dental laboratory customers with a greater selection of digital equipment, materials, and services. We believe these products will help them, our laboratory customers, to navigate through the important digital transition that is occurring in the dental technology space today and, I might add, at a rapid pace.

Further supporting our commitment to advanced technology and to help prepare the next generation of dental professionals for advances in digital dentistry, in May we announced the opening of the Henry Schein digital dentistry program at Temple University's Kornberg School of Dentistry. Technology advancements are affecting almost every aspect of the practice of dentistry, and we are committed not only to bringing those advancements to our customers, but also to making sure our current and future customers are well versed in all aspects of running an efficient and profitable practice, while allowing for high-quality patient care.

Dental students and faculty at Temple University now have access to the latest 3D imaging equipment, intraoral scanners, and milling machines made available as the result of this partnership.

Regarding our dental -- regarding our digital dentistry efforts, we continued to see strong growth in sales of digital impression solutions with our 3M, 3Shape, and PlanScan scanner offerings. The breadth of our product offering is reflective of our belief that customers want choice and open architecture for their restorative dentistry needs. This also creates an opportunity for follow-on software and mill sales when these dental practices are ready to move to full scale in our systems.

With Zahn Dental and CAP, we continue to be well positioned to provide innovative solutions to the lab market for restorations that are outsourced from the practice.

Let me just add that in North America CAD/CAM sales were strong in the second quarter, driven by digital scanner sales, while our traditional sales for -- traditional equipment sales were soft, and I might add, partially due to timing.

Lastly, I would like to comment on a recent change in our global dental surgical group. As of June, BioHorizons has become the exclusive distributor of CAMLOG branded products in the United States and Canada. This creates a unified sales force in the US for complete dental offerings to specialists and general practitioners. By combining the two sales forces for these high-quality complementary brands, we are creating a more efficient go-to-market strategy, giving our customers access to a greater selection of products and services, from high-quality branded to high-quality economy implants, with a wide variety of clinical-based products.

It also will afford more robust North American coverage and strengthening our position to effectively compete and grow our market share in, as I said, the premium and the value-added segments of the dental implant market.

We look forward to continued success in this important segment. These businesses are and actually have been doing quite well for a while.

Now let me turn -- and, of course, happy to answer more questions on the dental side during the rest of the call. On the animal health side, as Steven mentioned, when normalizing for animal health results, our internal sales growth in local currencies was 11.4% in North America, reflective of a healthy market, but also reflective of market-share gain. We have been gaining market share in North America in the animal health arena for a while now.

International currency sales during the second quarter were up 12%, with organic growth complemented by acquisition [growth]. We're making good progress with our diagnostic product portfolio, targeting practices that are nearing the end of their instrument lease agreements, as well as growing clinics with a need for multiple systems for high-volume testing. Indeed, sales of diagnostic products for North America grew in the low double digits in the second quarter, compared to the prior quarter. We believe this is ahead of the market growth in this sector.

Axis-Q continues to be an attractive element of our sales proposals as customers are strong -- benefits and efficiency -- see strong benefits in efficiently linking their practice management software with their diagnostic instruments. This is a holistic approach. It is not selling devices, nor is it selling software. It is the interoperability of devices and software connected to the practice management system, the clinical workstation.

As a reminder, Henry Schein's practice management software is today used by more than 50% of the US veterinary practices. Again, strategy here in the animal health space is doing very well, well thought out and being well executed, of course not only in the US, but throughout the world in the animal health arena where Henry Schein is, in fact, active.

Let me now turn to medical. The reported growth in our medical group of 14.5% was impacted by agency sales in the prior year. When normalizing for this impact, the core internal growth for North America medical was 10.4%, as Steven mentioned.

And let me stress this is the sixth consecutive quarter of double-digit sales gains. We continue to see solid growth from large group practices, including IDNs, the integrated delivery networks, as we on-board new customer wins from the past year. These are internal growth wins that we've been working on for a while and that are bearing fruit.

In addition, the expansion of large health systems with which we have built strong relationships over the past several years is contributing to our growth. Our focus on the ambulatory surgery center segment of the market is yielding solid results as well, as we are seeing strong sales in the sector, and our teams are making inroads with our smaller market segments, including universities and sports medicine, where we have a growing base of customers who rely on our broad value-added service model.

Now, let me talk about the technology and value-added services group. We are pleased again with the second-quarter performance of this business group. North American technology and value-added services internal sales growth was 8.5% in local currencies, matched the highest growth rate in more than three years. Strategic acquisitions have bolstered our market share in this business, as sales in local currencies increased by more than 21% in North America during the second quarter and by nearly 15% internationally.

Of course, we are very pleased with these results as reported through the P&Ls of these businesses, but let me remind our investors that, in fact, it is the stickiness of the value-added services that our practice solutions group brings to bear in our customer base that has the real strategic value.

Enhancing digital platforms across the businesses we serve is an important priority for Henry Schein, in fact one of our largest and perhaps most important priorities. We provide a means for our customers to better connect with their patients and improve overall efficiencies, thereby reinforcing our value to their practices and, in fact, allowing our customers to show their value to their patients. And we continue to develop innovative solutions to drive interoperability with devices and, of course, the cloud to manage workflows.

We are very, very pleased with the progress we made specifically on our cloud-based dental product and the connection between our practice management software and the devices in the dental space, whether it is in the imaging area or in the prosthetics area, likewise, as I reported earlier on, in the animal health space with our diagnostic and imaging product offerings that are connected so well to our practice management software, which will only get better over time.

So, as you may know, 2015 was a special year for Henry Schein as we marked 20 years as a publicly traded company. In May, we had the opportunity to celebrate this milestone as we opened trading at the NASDAQ stock market. 20 years ago, we had a vision for what Henry Schein could become. Since then, more and more people have joined us in sharing that vision, in building our Company and expanding our presence in the global markets we serve. And all the while, we have demonstrated we can successfully serve shareholders, while also serving society and, of course, our suppliers and our customers and the team.

We are pleased to have accomplished so much as the result of the hard work of Team Schein members across the globe over the past 20 years since we have been public. We continue to be most optimistic about our strategies. We are unwavering in executing our strategic plan, which revolves around the notion of helping practitioners operate a more efficient practice while providing better clinical care. We feel that we have the right strategies and the tactics in place and will, of course, make sure that we manage our expenses in a way that delivers on our commitments to our shareholders.

Lastly, we are pleased to announce that in June Henry Schein moved up to number 268 in the ranking of the Fortune 500, celebrating our 13th year as one of America's largest corporations. This is testament to more than 19,000 Team Schein members throughout the world who are dedicated to helping our customers build better practices so they can provide better quality care. We, of course, have been on the list of Fortune's most admired companies for the entire period.

So with that commentary and an overview of our quarterly results from both a financial and operating performance point of view, thank you for your attention and we are, of course, ready to answer any questions that shareholders may have.

Sylvia, can you open the Q&A, please?

(Operator Instructions). Jeff Johnson, Robert Baird.

Steve, I guess, or Stanley, I guess it is a question for either of you, but I am having a little trouble reconciling, I guess, a couple things. And one is that you are having some very solid performance in the vet and the medical side, probably better than we expected it. I don't know if it's better than you expected, but better than we expected. Dental is soft, but if I back out that little bit of precious metals, consumables still growing north of 2%. So, no big disaster there.

But, Steve, when I look at your guidance, you're taking it down $0.05 at the top, another $0.05 if I adjust for the tax rate update you provided today. It just seems like it is a pretty sizable takedown in guidance of $0.05 to $0.10 at the topline when there is strength elsewhere in the business, and I just can't understand maybe how sizable that change was on the dental side in the last month or two in what you have been seeing.

Well, there's a couple of things. Remember, we do want to be cautious and on the conservative side in our guidance. As we have said, in the US dental we saw slowness of sales that began in June, and while we are not convinced that this is a long-term permanent impact, we do want to make sure that if it continues for a little while that our guidance is sustainable.

We do have foreign-exchange headwinds. We do expect, although we haven't seen much impact right now in the UK, we do expect that the UK market will soften, and as you probably know, about 8% of our revenues are in the UK market, between dental and animal health.

We also, because I know you know this also, but when you look at profitability, US dental on a distribution business is our most profitable business, so we have a mix issue on profitability where the most profitable business is going the slowest, and while medical and animal health are nicely profitable, they are just not as profitable.

So there's a lot of things going on, Jeff, and we just feel that right now, given that we were not expecting this June sales slowdown, is the time to be a little bit cautious in the market. So hopefully that helps you a little bit.

That does. And maybe just one follow-up, then, is it sounds like July really hasn't bounced back, or I would assume it hasn't if you are taking the guidance down the way you are. And then, I know you don't give segment-specific operating margin details, but just qualitatively within that, within medical, are those margins holding steady? Is dental margin itself coming down or is the 9, 10 basis points of operating margin contraction we saw this quarter, once we adjust for all the moving parts you talk about, is that 10 basis-point contraction just mix driven more than anything? Thank you.

Okay, yes, it is primarily mix driven. We did not see a significant rebound in US dental sales in July, consumable sales. It is really right now continuing at similar rates to Q2.

On the other hand, equipment, we did see an increase in equipment demand. Our backlog is very strong and increasing on equipment. We do expect an uptick, a modest uptick, in consumable sales in the US, but again we are trying to be cautious.

And I would like to point out when you look at our margin and look at the components of our margin, for the quarter, excluding restructuring costs, our operating expenses are down 35 basis points versus the prior year, and if you exclude the acquisitions in the last 12 months, operating expenses are actually down 55 basis points. So our restructuring activities are making us more efficient, but on the gross margin level, dental consumable sales for distribution are our highest gross margin business.

So, again, we're trying to be cautious in the market and a little bit conservative until we -- we need more data points in the future in order to be able to talk about what we are seeing for longer term in the market.

Thank you, Steven. Let me just add a little bit more flavor. First of all, there is no IMS data as we have said over the past -- in dentistry.

But it is our view that essentially from a units point of view, the market is flat. It is not going down; it is not going up. I am talking about the US consumable market. And we think that the market is growing at about 2%, which is essentially price increases.

We have now -- there is an independent market data product out there. It is not accurate, but it does show modest sequential downturn and it is more or less accurate directionally. But two months is not a statistically valid view of that market, from our point of view.

We have also spoken to several key manufacturers who support this view that the consumable business in the US is essentially flat with a couple of hundred basis points of inflation. So, we are talking about 100 basis points, 80 basis points margin of error. It is very, very small. And in that context, we believe we are still gaining market share and have gained market share consistently for a while. We hear this from all of the major, most of the major, if not all the major, manufacturers. So, we want to take a cautious view.

I would be quick to say that our demand for equipment is good. One of our key manufacturers was delayed a little bit in the second quarter with providing equipment, a new system which we had taken a lot of orders for. We believe that that equipment will be delivered in time for the third quarter, so we are looking at a much better second quarter. But within these hundreds of basis points this way, that way, we want to be on the cautious side.

I also mentioned earlier on that we are doing quite well with CAD/CAM sales, particularly the scanners. So, we have to be careful not to be too negative, but also want to be cautious here, and, yes, our medical, our animal health, our oral surgery, our dental specialty businesses in general remain solid. In fact, our corporate accounts business, our special markets business in dentistry is actually doing quite well and so is the midmarket.

The area we just can't put our finger on right now is what is happening to the smaller Main Street dentist in the US. And again, overall, we do see that we are gaining market share in this country and abroad in all of our businesses. We don't see any area on the strategic side we want to moderate or change. Perhaps we want to advance the solutions business leading with software a little bit faster.

But, overall, I think Steven is right to be on the cautious side and we want to reduce the top end a bit of our guidance. So, it is really cautionary, indicative of these numerous areas that may be slightly questionable, including the economy in this country and in Europe. We're actually quite comfortable that we will deliver good results in the end in Europe, but the economy in Europe is out of our control. So that's why we would like to be a little bit more cautious and also control our expenses a little bit more carefully.

John Kreger, William Blair.

Stan, maybe just to follow up on that same theme. How did some of your specialty products do across dentistry versus more your typical preventive and restorative? So, for example, how did your implants do in the US and Europe?

So, our implant business in general, John, is doing okay. And again, we want to be careful about not creating expectations that we are going to report monthly sales on an ongoing basis. But because of this particular situation, it caught -- I must say, it cut us a little bit by surprise heading into our dental national sales meeting in June. It is possible that a little bit of a downtick occurred because our entire sales force was out of the field for a while.

But to answer that question directly, May -- April and May were pretty good in the implant business. June was a challenge, but it would appear that July bounced back. But again, John, we're talking within hundreds of basis points both sides -- not even hundreds, 100 or so basis point both sides. So, I am not sure if this is conclusive on the downside or conclusive on the upside.

I will say the US implant market is quite strong. We are comfortable with the European markets for implants, but on the margin our implant business has been driven by a few countries, not by Henry Schein on the ground, but through distribution agents in countries like Russia and Turkey and even Japan. And these are markets that have been very helpful, again driving within 100 basis points year-over-year growth, but we're a little cautious about these markets.

Having said that, let me quickly remind that we are quite comfortable with our two big markets for BioHorizons, the US, Canada, and for CAMLOG, Germany and the DACH region.

Great, thanks. And then one quick follow-up, the trends that you have been talking about over the last few minutes in June in particular, did you see that consistently across your various SKU categories within consumables or were they isolated to certain ones that might suggest this is a volume issue or more of a spending per visit issue? Thanks.

It's a good question. You can imagine, to quote one of our finance people, we have been torturing the numbers. And really, we cannot come up with anything 100% conclusive.

What we have told you is what we believe, and I think we don't want to create a precedent of having to go into this detail every quarter, but because of this unusual situation that occurred in June, we felt we should provide a little bit more information.

But there are clusters leading one way, but there are clusters going the other way, and it is really very hard to come up with anything conclusive, other than to say that this particular survey, this independent market survey, does show modest sequential downturn, but it is only good from a directional point of view and manufacturers have given us this view.

But I have to tell you there are manufacturers that have shown us that business has been good, and for those -- and I would say more or less across the board, Henry Schein has been gaining -- continues to gain market share. And again, I am talking about consumables, because I think the equipment business is quite sound, especially in the digital space, whether it is digital imaging or digital prosthetics.

Thanks much.

Jon Block, Stifel.

I will try to ask two. The first one, just the delta in growth between North America animal health and dental is significant. You've got animal health growing about 11% adjusted, dental consumables, 2% to 2.5%. So, Stanley, can you talk to the consumer and why you think we are seeing this divergence in these two industries? And is this sustainable? In other words, can you have this, call it, 900 basis-point delta in growth between what are essentially two consumer-driven industries? And then, I've got a follow-up. Thanks.

Jon, that is probably the number one vexing question we have. The animal health market is doing well. Yes, we are doing better than the market, both here and in Europe. But it is doing well. It is alive and well.

We saw similar things, and I don't want to draw any more analogy to what I'm about to say than just the narrow point I'm going to make. Don't mean any trends into this. But in 2008, 2009, and 2010, animal health mostly, in most of those quarters, did better than dental.

But I don't want to come to any conclusions because there are a lot of other factors in dental -- insurance. We have to also remember I think we may have gotten a false positive in the first quarter because our growth was significant on consumables and that may have been due to weather.

I think the dental market in the United States has been more or less flat for a while and driven a little bit by inflation, and also perhaps visits to implant dentists a little bit more. But, again, we are in a few hundred basis points here in dental and it is hard to gauge what is happening specifically within that range.

Having said that, the animal health market is a healthy market around the world, driven by the middle class and, as we have said before many times, the baby boomers. They are buying more pets.

Again, I'm not really speaking on behalf of the agric side of it, the production side, which has its own dynamics related to the milk price, the meat price, but Henry Schein is not a big player in that space, with the exception of a few markets, like Ireland or New Zealand where we are in the dairy field, and in a couple of markets, Australia and in parts of Europe, where we have some production.

But from a pet point of view, it is growing. The demand for pets is growing and people are spending more money. We have seen that with our customers, both the customer that is public and the customers that are not public. It is a hot space. It is a good space, and I would say the medical space is good, too, but it is not driven by consumer issues on the medical side. It is driven by a realignment in the way in which health care is provided.

Obviously, we have shown very good results on the medical side for the past six quarters, but obviously it is not sustainable at that high level, although we remain very optimistic in our ability to gain market share, and the foot traffic into the medical office is not really as important as us gaining bigger accounts.

Got it. Perfect, that was very helpful. And, Steven, one for you. Your third-quarter commentary around mid single-digit earnings growth implies around $1.90 or low to mid-teen EPS growth for 4Q. So can you just talk to your level of confidence on that reacceleration? Does that assume any snapback from a topline perspective or is it just the easy year-ago comp in 4Q and some of the restructuring initiatives taking hold? Thanks, guys.

Jon, so for Q3, the first important thing is Q3 was a difficult comp on an EPS level and an easier comp in Q4. And specifically, Q3 of last year had 15.7% EPS growth, so it is a more difficult comp; that's one thing.

Some of the things that we talked about, cautious view of dental market in the US, Brexit, foreign exchange, but there is also timing of expenses between Q3 and Q4. There is also restructuring -- further restructuring activities, which will only have a modest impact in Q3 and have a greater impact in Q4. And lastly, a potential for flu vaccine sales timing that could be a little bit negative for us.

But the biggest reason, just I gave you a laundry list, but the biggest reason is that 15.7% EPS growth last year's third quarter.

Robert Jones, Goldman Sachs.

Thanks for the questions. And just -- I hate to go back to this, but just on the North American dental market, I wanted to hone in a little bit on the merchandise side. It obviously must've really fallen off in June, based on your commentary.

I'm curious. Is there anything you could elaborate on or share with us relative to the competitive environment? Did you see any changes in behavior from your traditional competitors and the way that they are approaching their go-to-market strategy? Did you see any increased pressure from alternative distribution channels, like online pure-play competitors? Just anything that might help us get our heads around what seemingly was a pretty consistent growth until May, and then obviously what -- based on the numbers you have shared seems like a fairly dramatic pullback in June, would be helpful.

Yes, so, Bob, let me stress that this is not the first time we have seen this, even in the last three, four, five years. We do periodically have a month or two months with a challenge.

What happened here is that we had an extremely good April and May and we didn't expect it to fall off this much. So that's number one.

Number two is I don't think there is any major change in dynamics on the competitive side. It is a competitive market, to be sure. There is no shortage of competitors. Everybody is fighting for that last dollar, so it is a competitive market.

Having said that, we do own some brands in the discount area and they did not see any real change in dynamics. Their trending is more or less the same as ours. We have those interests in these businesses just so we can keep an eye on what's going on on that side. By the way, we do this not only in the US, but throughout the world, and we don't see any major change in the competitive pressures. In fact, on the contrary, we see equipment doing quite well and practitioners investing specifically on the digital side.

So, if we -- what we have said is what we know. We don't normally go this deep into it, but given this change, we felt we should be more explicit. And I can't, and nor could Jim Breslawski, the President of Henry Schein, the CEO of our dental business, nor could he point to anything specific on the competitive side.

Yes, and just to add to that, based on the data that we have, we don't see any share shifts of any magnitude that we could -- that we can reasonably comment on. So we don't think that our share really changed dramatically during this period. We think the biggest issue is we just had a soft June market.

Got it.

On the share gain, directionally I think we continue to gain share, and this seems to be an issue with the very small practices. And, yes, the very large ones seem to be growing a little bit and the midmarket ones are growing quite substantially, but the little ones are struggling a bit, at least from a June point of view.

I would not take that and extrapolate it and say the smaller practices are having problems. But it seems that in this particular two-month cycle, there was a challenge there.

Okay, got it. Then I just -- one quick follow-up. You guys mentioned extending the restructuring program beyond this year. Can you remind us how much of the current program has reduced the cost base so far? And then, how will the extended program compare to the details you shared around the initial program?

Okay, again, on the previous call I highlighted some of that. For the current quarter, excluding restructuring costs, now the core operating expenses and excluding acquisitions that were done within 12 months, because they just change the base, we took down operating expenses as a percentage of sales by 55 basis points.

So we are looking to do more. Right now, we are still determining exactly what additional restructuring activities should be executed on and that's why we can't give an estimate for how much the additional restructurings are, because we haven't finalized that. But we do expect to take operating expenses down even further, again to reflect this more cautious view.

And there's opportunities there for us, but it is real difficult to pinpoint that at this point.

David Larsen, Leerink.

Can you talk a bit about the medical division? It looks like the growth rate was very good in the quarter, but it seems like it did decelerate a little bit sequentially. How is the relationship with Cardinal and how are trends in that space? Thanks.

David, I think we've mentioned the last couple of calls that sales in medical to some extent is -- to a large extent -- dependent on bringing on these larger accounts and they come on board in a lumpy way.

So we've brought a lot of these accounts on board in the last two years. It is obviously not sustainable at these phenomenal rates because the market is not growing by these rates. The market is probably, and there is no specific data, is growing by a couple hundred basis points and definitely not because of inflation; because pricing is moving from branded to generics on the pharmaceutical side and on the med-surg side.

So we have had very healthy growth in this area, organic. We are growing on top of that, so I would repeat what we said in previous calls that we are gaining market share. I think we are gaining very nicely on the market-share side organically. Of course, the Cardinal acquisition did help, but organically I think that's where the impetus is coming from.

So, I'm not sure, as I said I think in the prepared remarks, that these double-digit growth numbers are sustainable in medical, but we will grow at a multiple of the market and we will increase our profits in this area as we drive a more profitable mix in products in this area. We are very happy with our medical business.

Now on the Cardinal side, the integration of the Cardinal Health physician office business is substantially complete and we have received positive feedback from the acquired customer base. There is a lot of change going on in healthcare, and we are in the process of modifying our purchase commitment to Cardinal to reflect the rapidly changing environment that makes more business sense from both of our points of view.

We are creating greater flexibility in our relationship with Cardinal, specifically around the integrated delivery networks. They are better at servicing aspects of the IDN and we are better at servicing other aspects of the IDN. So, we are modifying the marketing arrangement with Cardinal and there are certain products that doesn't make sense for us to buy from Cardinal. They have very good procurement pricing as it relates to hospitals, but the demand for choice in the physician market is much greater than in the hospital, where formularies can be mandated and not so much mandated in the physician space and even in large group practices.

So, we are modifying this thinking right now with Cardinal, but I would say our internal growth is pretty good in the physician space, arguably the best of all the players, the bigger players, and we are very optimistic about this business and actually optimistic about the strategic direction we could take this business in over the next five years.

Great. Thank you.

Ross Muken, Evercore ISI.

This is Elizabeth Anderson in for Ross. I was wondering if you could give us any updated thoughts in terms of the M&A pipeline, in terms of valuation or technologies that you guys are looking at.

I would say that on the M&A side we very rarely participate in books that are put out. We have bought some companies with respect -- where a book has been put out, for example BioHorizons. But, generally, our deals are known well in advance before they close. It's usually a family company, a private equity firm that understands we are the best buyer.

And so, really, yes, I think prices are higher in that segment than they were before, because interest rates are lower, but we don't participate really in the bubbled pricing where you are seeing crazy multiples on some deals because private equity has a lot of money on the sideline and because interest rates are low.

Our deals are deals that are carved out for specific strategic reasons. A family wants us to buy 80%. Somebody wants to stay a partner, wants to merge with us, bring their product through our channels, and I would say we have no shortage of deals. Our pipeline is pretty good, and I think we're still on line with putting to work, I think, what is it, $200 million, $220 million, $250 million.

Yes.

Sometimes as much as $300 million, but I doubt less than $200 million a year from these (multiple speakers). These kinds of deals in the end are expensive in the first year from a P&L point of view, because you have got all the deal costs. Sometimes you have software amortization that has to be picked up in the first year or inventory adjustments, but in the second year or so they become very profitable.

Okay, great. And I guess as a follow-up, my other question is, have you seen any changes in the large-practice dental market in terms of increased competitiveness or anything like that? I know that some of your competitors have been saying that they're looking more closely at that end of the market. Thanks.

Sure, there is always increased competition. There is no shortage of suppliers that would like to take these accounts.

And we believe that we have very good value-added services. Of course, we will lose an account from time to time, but I think in the end we have shown that we can gain more accounts that lose them, especially those that are centrally managed that are formulary driven. I think our knowledge from the medical space, which we have introduced into the animal health space and into dental, stands us in good stead.

But, yes, there is obviously increased competition. To my knowledge, there has been increased competition over the past decade, almost, and I think we are doing okay, and we are building more and more value-added services. That's the nature of the free market.

So, thank you, everyone, for calling in. We're, of course, very bullish about the future of Henry Schein; nothing has changed there. We have a good strategic plan. We start in January 2017 working on the strategic plan for 2018, 2019, and 2020. I am sure that will result in allocation -- reallocation of resources, as you would expect, but overall we are very pleased with the direction, the longer-term results. Sometimes one business is ahead of another. That's the nature of business. Sometimes you have a challenge here and you have a challenge there, and you have a plus here and a plus there.

We have a great management team, a team in the organization that is highly motivated and ready for even more competition. And so, we remain very, very excited about where we are and the opportunity for the future.

If anybody has further questions, please contact Carolynne Borders at 631-390-8105, and thank you for your participation and I look forward to speaking with our investor community again in 90 days. I believe Steven, and I am not sure about myself, but I know Steven will be at investor conferences over the next 90 days and certainly are ready to speak about any questions that you may have in the form of clarification of information already disclosed. So thank you very much.

Ladies and gentlemen, this does conclude Henry Schein's second-quarter conference call. Thank you for participating. You may now disconnect.