漢瑞祥 (HSIC) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Henry Schein third quarter conference call.

(Operator Instructions)

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, Carolyn.

Thank you, [Betina], and thanks to each of you for joining us to discuss Henry Schein's results for the third 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 materially 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 on the Company's internal analysis and estimates. The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, November 2, 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. With that said, I would like to turn the call over to Stanley Bergman.

Thank you, Carolyn. Good morning, everyone, and thank you for joining us. We are pleased to report record financial results for the third quarter. We believe we gained market share in each of our business groups as a Company, as the Company continues to be well served by our diversified portfolio and an expanding global customer base. Today we are affirming guidance for 2016 GAAP diluted EPS growth of 7% to 8%, or 10% to 11% on an adjusted non-GPA basis.

We are also pleased to introduce guidance for 2017 diluted EPS that represents growth of 17% to 19% on a GAAP basis or growth on a 9% to 11% basis on an adjusted non-GPA basis -- both compared with respect to mid point of 2016 guidance. In a moment I'll provide additional commentary on our recent business performance and accomplishments. But to set the tone, we remain very pleased with the state of the Company, with our continued market share growth throughout the world and believe we are operating in very good markets. So, Steven, please provide your financial report.

Okay. Thank you, Stan, and good morning to all. As we begin I'd like to point out that our 2016 third quarter results include restructuring costs of $5.4 million pretax or $0.05 per diluted share. Our Q3 2015 results include restructuring costs of $8.4 million pretax or $0.08 per diluted share. Also our prior year third quarter results include a one-time income tax benefit net of controlling interest of $3.8 million or $0.05 per diluted share related to a favorable tax ruling.

I will be discussing our results as reported on a GAAP basis and also on an adjusted non-GAAP basis, which excludes the restructuring costs and the prior year tax benefit as we believe the adjusted non-GAAP financial measures provide investors with useful, supplemental information about the financial performance of our business enabling comparison of financial results between prior periods where certain items may vary independent of business performance and allow for greater transparency with respect to the key metrics used by management and operating our business. These adjusted 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 in exhibit B of this mornings earnings release, a reconciliation of GAAP to non-GAAP results.

So first turning to our sales results. Our net sales for the quarter ended September 24, 2016 were $2.9 billion reflecting a 6.7% increase compared with the prior year's third quarter and this consists of 7.7% growth in constant currency and a 1% decline related to foreign currency exchange. In local currencies our internally generated sales increased 6.0% and acquisition growth contributed an additional 1.7%. When further normalizing our results for switches between agency sales and direct sales, that internal sales growth in local currencies for Q3 was 5.6%. You could see the details of sales growth in exhibit A of today's earnings release.

We go to operating margin on a GAAP basis for the third quarter of 2016 was 7.0%. And that was a contraction of 3 basis points compared with the third quarter of 2015. There are three key items that negatively impacted our GAAP operating margin by approximately 17 basis points. The first item relates to acquisitions completed during the past 12 months and the related expenses for those acquisitions as well as the switches between agency sales and direct sales. They combine negatively impacted the contraction by 14 basis points.

Second, flu vaccine sales this year had a lower margin compared to the prior year and that negatively impacted our operating margin by 15 basis points. This was offset by the third item that was related to a decrease in restructuring cost in the third quarter of 2016 versus the same period last year and that favorably impacted the contraction by 12 basis points. So when you net out those three items, the net impact of these items our operating margin on a non-GAAP basis expanded by 14 basis points. If you look at our reported GAAP effective tax rate for the quarter it was 28.9%. On an adjusted non-GAAP basis it was slightly lower at 28.7%. This compares with an adjusted non-GAAP effective tax rate of 29.6% for the third quarter. As you'll recall, we had a favorable tax audit that we discussed last quarter that allowed us to reduce our overall ongoing effective tax rate and we expect next quarter the effective tax rate on both a GAAP and non-GAAP basis to be in the same 28% range that we're showing this quarter.

Net income attributable to Henry Schein on a GAAP basis was $133.7 million or $1.63 per diluted share representing increases of 4.7% and 7.2% respectively, both compared with last year. Excluding restructuring costs, adjusted non-GAAP net income attributable to Henry Schein for the third quarter was $137.7 million or $1.68 per diluted share. And that represents increases of 5.5% and 8.4% respectively compared with last year, also on a non-GAAP basis. I think that it's important to point out that foreign exchange negatively impacted our diluted EPS for the quarter by approximately $0.01. And that was offset by share repurchases which benefited by about the same approximate $0.01. So they kind of netted each other out.

Let me provide some additional details on sales by business group. Dental sales for the third quarter of 2016 increased 5.1% to $1.3 billion. This consisted of 5.6% growth in local currencies and a 0.5% decline related to foreign currency. In local currencies, internally generated sales increased 3.9% and acquisition growth contributed an additional 1.7%. Looking at North America, the North American internal growth in local currencies was 4.4% and that included 1.8% growth in sale of dental consumable merchandise products and 13.3% growth in dental equipment sales and service revenues. I'd like to point out that the dental equipment revenue benefited, to some extent, from an acceleration of sales from Q4 into Q3. And that was associated in part with some promotional activities that occurred in the third quarter.

I'd also like to reiterate that our growth rate was impacted by the decision to stop selling precious metals that we discussed last quarter. This decision negatively impacted our North American dental merchandise sales during the current quarter by approximately 50 basis points. And that will continue to impact our merchandise sales growth for the next two quarters until fully annualized. Our annual sales of precious metals in the prior year was approximately $14 million. And, again, that won't reoccur in 2016 or going forward. International internal growth in local currency of our dental group was 3.1% and included 2.7% growth in sales of dental consumable merchandise and 4.2% growth in dental equipment sales and service revenue. On an overall basis we believe we out paced the global dental market for the current quarter and we believe the fundamentals for our business strategy remains strong.

Turning to animal health. Our animal health sales were $790.3 million for the third quarter. That's an increase of 7.9%. The components include growth of 10.6% in constant currencies and 2.7% decline related to foreign currency. Internal sales in local currencies grew 8.6% and acquisitions contributed an additional 2.0% to our growth. That 8.6% internal growth in constant currencies consisted of 10.0% growth in North America and 7.2% growth internationally. The normalized impact of animal health results, which, again, accounts for the switching of products from agency to direct sales, that 8.6% internal growth in local currencies reflects a 6.9% growth, including 6.6% in North America. Again, this normalized growth rate is a more meaningful reflection of the ongoing performance of our North American animal health business. We believe these were solid results and we believe we continue to gain market share, both domestically and overseas in animal health.

Turning to medical. Medical sales were $639.6 million for the third quarter. That's an increase of 7.1%, which is all internally generated. There's no material impact of sales growth related to foreign currency for this business and the components of that 7.1% included growth of 7.4% in North America and a slight decline of 0.9% internationally. Again, we're pleased with the medical growth and we believe we gained market share also in the medical market.

Last, turning to technology and value-added service sales, they were $104.7 million in the quarter. That's an increase of 16.7%. That included 18.3% growth in constant currencies and a 1.6% decline related to foreign currency. The components of that constant currency internal growth was internally generated sales increase of 7.6% and acquisition growth was an additional 10.7%. And that 7.6% growth globally included 7.0% growth in North America and 10.8% growth internationally. I'd like to point out that the North American sales were highlighted by growth of more than 11% in our financial services businesses. These businesses include equipment and practice financing, credit card practicing, practice brokerage, patient collections and other services. Internationally the technology sales growth was driven primarily by increased software services.

During the quarter we continued to repurchase common stock in the open market. Specifically we repurchased 1.2 million shares during the quarter at an average price of $163.62. And that is approximately $193 million. As I said earlier, the impact of the repurchase of shares on our third quarter EPS was about $0.01 favorable. Our share repurchase program demonstrates our long term commitment to create further value for shareholders and reflects our confidence in the long term prospects of our business. In line with this, we increased share repurchases in the third quarter at a greater rate than prior quarters.

Also, on October 19 of 2016 we announced that our Board of Directors authorized an additional repurchase of an additional $400 million of shares of the Company's common stock. That's an addition to the program that was announced in December of 2015 and we have completed the purchase of that December 15 repurchase program. Again, we continue to believe our capital allocation strategy, which deploys a large portion of our annual free cash flow to share repurchases and M&A activities, will continue to drive increased shareholder value.

If we look at some of the highlights of our balance sheet and cash flow, we had very strong operating cash flow for the quarter, $178.1 million. That compares to $107.4 million last year. And, again, we believe that strong cash flow will continue for the balance of the year. Our DSO, or Day Sales Outstanding, and accounts receivable was up slightly to 42.4 days for the current quarter versus 40.6 days last year. And inventory turns, the other key metric, was 5.6 turns and that's relatively unchanged from last year, which was 5.7 turns.

Let me conclude my remarks by discussing both our 2016 and 2017 financial guidance. For 2016 we expect GAAP diluted EPS attributable to Henry Schein Inc to be $6.11 to $6.16. That represents growth of 7% to 8% compared with the GAAP diluted EPS of $5.69 for 2015. Adjusting non-GAAP -- adjusted non-GAAP diluted EPS excluding the restructuring costs ranging from $0.42 to $0.46 per diluted share is expected to be $6.55 to $6.60 for 2016. And that represents growth of 10% to 11% compared to the adjusted non-GAAP diluted EPS of $5.96 for 2015. I'd also like to note that a significant portion of our EPS in the current quarter in excess of the consensus estimates for the current quarter was impacted by favorable timing versus the fourth quarter. The 2016 guidance assumes Q4 adjusted non-GAAP diluted EPS in the high single-digit to low double-digit range or in the high single-digit range on a GAAP basis.

Guidance for 2016 GAAP EPS and adjusted non-GAAP diluted EPS attributable to Henry Schein is as always for continuing operations as well as any completed or previously announced acquisitions but does not include any impact from potential future acquisitions, if any, or any restructuring costs. Henry Schein expects that the current restructuring activities to be completed this year in the fourth quarter. We expect restructuring costs in Q4 2016 to be $17 million to $22 million pretax or $0.15 to $0.19 per diluted share. I'll also point out that our 2016 guidance assumes foreign exchange rates that are generally consistent with the current levels. However, we believe that the US dollar may continue to strengthen, especially against the British pound. And remember that about 35% of our worldwide sales are in currencies other than the US dollar.

I'll also just remind people that our results this year are on a 52, 53 week basis ending on the last Saturday of December. So FY16 consists of 53 weeks. This extra week is in the last week of Q4 2016. And obviously since that's a holiday week at the end of the year between Christmas and New Years, sales are generally lower during that week and we anticipate that the extra week will not materially add to our earnings since fixed expenses remain relatively constant. When we report Q4 results, we'll also provide information on the sales impact of that extra week.

Turning to next year. We're introducing 2017 financial guidance as follows. GAAP diluted EPS attributable to Henry Schein is expected to be $7.17 to $7.30 for 2017. Since we do not expect to incur any restructuring costs in 2017, there is no separate non-GAAP guidance. The GAAP guidance will be the only guidance that we are reporting. And this guidance reflects 17% to 19% on a GAAP basis compared to the prior year and 9% to 11% on a non-GAAP basis when using the non-GAAP numbers for the prior year and the mid point of those non-GAAP numbers. Similarly to the 2016 guidance, the 2017 guidance is for current operations, does not include any previously announced acquisitions or the potential impact of future acquisitions. And, again, I'll point out that we assume foreign exchange rates are generally consistent with current levels. So with that quick summary, I'd like to turn the call back over to Stan.

Thank you, Steven. Let me begin my review of our four business groups with the dental group. Our North American dental consumable merchandise growth in quarter three was relatively consistent with the quarter two growth. Sales of dental specialty products did well in the third quarter with particular strength in the implant sales worldwide. While the dental consumable merchandise market continued to reflect somewhat slower than historic growth, it appears to be stable. Though not back to the levels we saw a couple quarters ago, we believe that the soft US dental market is more temporary as September sales growth accelerated. Although October was somewhat soft, we believe that October sales growth was negatively impacted by the weather in certain areas of the country.

I would note that we have demonstrated our ability to deliver profitable EPS growth even during soft market conditions. North American dental equipment internal sales growth in local currencies is 13.3% during the quarter -- was, shall I say. Sales of high-tech equipment with strong Cad/Cam and Zahn customer automated prosthetic product sales experienced double digit year-over-year internal growth in local currencies. Note that equipment growth benefited to some extent from an acceleration of sales growth associated in part with the promotion in the quarter.

Favorable dental equipment purchases are typically a leading indicator of dental practitioner sentiment. We do believe that the third quarter equipment sales in North America, coupled with the potential benefit from the section 179 tax incentive, indicate that current market slowness may not prevail over the long term. That said, we are still closely monitoring industry data points as they become available in order to gauge the growth of the dental end-market in North America. We would like to see additional future market data to draw any firm conclusion on sales chains.

As we implement initiatives to expand digital dentistry in North America and abroad, we are pleased to report that sales of our digital impression solutions continue to be strong. Year-over-year quarterly sales once again grew in double digits for our global prosthetic solutions business worldwide. We have an excellent product offering with scanners from PlanScan, 3shape and 3M in North America, Australia and New Zealand, supported by a software platform that features all-in one capabilities and open architecture. This allows dentists to choose the best technology for their practice. In Europe we are the leading distributer of Sirona dental equipment. We are playing an important role in educating dental practitioners on the benefits of CAD/CAM technology and integrated digital workflows and we are well positioned as the market adoption continues to evolve.

As I mentioned, sales of dental specialty products, which include implants, orthodontics and endodontics, did well this quarter. In particular, we posted low double digit worldwide sales growth with dental implants. Today we are well positioned to leverage the attractive opportunities in these fast growing markets with high margin products. Our dental specialty product offering is highly synergistic with our core dental business as an increasing number of general practitioners are now performing more specialty procedures themselves rather than referring them out. It is our goal to capitalize on our relationships with these GPs, these general practitioners, and help their practices generate new sources of revenue while providing their customers, their patients, with a great quality of service and clinical value to their patients.

Finally, with respect to our dental business, during the third quart we announced a definitive agreement to acquire an 80% ownership position in Marrodent, one of Poland's largest full-service dental distributors, with 2015 sales of approximately $32 million. Marrodent marks the Company's entry into the Poland dental market, opening opportunities for approximately 20,000 dental offices to do business with us and building upon a presence following our 2014 entry into the animal health market in Poland, which has proven to be most successful for the Company. The transaction is expected to close in the fourth quarter of 2016. We look forward to serving the Polish dental community with the same high standards of commitment to efficiency and success that customers throughout the world have come to expect from Henry Schein, helping new Polish customers operate a more efficient practice so that they, in the end, can provide better quality care to their patients.

Now let me touch briefly on our animal health business. As Steven mentioned, when normalizing animal health results for agency switches, our internal sales growth in local currency was 6.6% in North America. International sales during the third quarter were up 11% in local currencies with 7.2% internal growth complemented by our strategic acquisitions, including KRUUSE in Denmark and [VetCorp] in Australia. We believe the animal markets in the US and abroad are healthy and continue to grow. With our focus on the companion animal segment in the US, we see significant opportunities to expand our market share by servicing all the practices needs of office space veterinarians with products and related services, including our software to address the clinical diagnostic and reference lab requirements.

We do have an excellent portfolio of products and services that is arguably the deepest in the industry. Our practice management and Axis-Q software solutions offer robust clinical integration features to connect with diagnostic systems, capture revenue and help practice operate efficiency. Our goal is to help animal health practitioners operate a more efficient practice so they too can provide better quality care. We continue to believe we are making good progress in executing on our diagnostic sales strategy and are very pleased also with the performance of our global animal health group.

Let me now turn to our medical group. We believe our medical sales growth of 7.1%, all internally generated, was well in excess of the broader market and reflects our ability to increase market share as we capitalize on our exposure to large group practices, including IDNs, the integrated delivery networks. We continue to benefit from trends associated with Affordable Care Act in the US as there are more covered lives and more procedures moving from the hospital setting to the general practitioner offices. And the office practitioner, of course, is our primary customer. We believe our medical businesses can grow at a healthy rate in the high single-digits in the market that is currently growing in the low single-digits, even potentially less.

I'll conclude my business overview with technology and value-added services. We are pleased with the third quarter performance of these businesses as we are with our other groups. Internal sales growth in local currencies was 7% in North America and 10.8% in our international business. North American sales were highlighted by growth of over 11% in financial services business while international growth was primarily driven by software revenue. Strategic acquisitions contribute to growth in local currencies of nearly 18% in North America, including the contribution of Vetstreet, and growth of more than 21% internationally driven by RxWorks.

Our technology offerings are key elements to our total solutions platform at Henry Schein. Technology will be a critical enabler of more efficient patient-friendly practices. We're investing in the development of products that will help us better service and grow our install base. Lots of exciting activity going on in the technology group. Our next generation of solutions will be ready to meet the requirements of faster and easier access to data, the sharing of workflow in the cloud and streamline communication with patients. Interoperability with devises will also play a big role here and really, really doing great work in this part of the business.

So before we take your questions, I'd like to make a few remarks about the future strategic initiatives of the Company. We are beginning the process to develop the 2018, 2020 strategic plan. In keeping with our focus on providing value-added solutions to our customers, this plan will build on our foundation of delivering high margin products software and services that help practitioners drive more successful, more profitable businesses while providing the best in quality care. The combination of practice efficiency and providing quality care are the hallmark of the Henry Schein value-added services offering that will play a key role and be center to our 2018 to 2020 strategic plan. So, operator, with those comments, we are ready to open the call for questions.

(Operator Instructions)

The first question comes from the line of Ross Muken with Evercore ISI.

Hi. This is Elizabeth Anderson in for Ross. I was wondering if you could talk a little bit more about the North American dental market and, particularly, the consumables in the quarter. And then also what you're seeing in terms of competitive levels for different segments like large groups or smaller ones. Thank you.

So thank you for that question. We believe the US dental market continues to be quite stable. In our view, the soft US dental consumable market is more temporary in our view, again, as September sales growth accelerated. Now just to be clear, we're talking about hundreds of basis points -- even less than that -- swings so it is hard to measure this impact on a month-to-month basis. September was strong. October was soft. We believe the October sales growth was negatively impacted by weather in certain areas in the market -- in the country. When I say soft, I mean relatively soft in terms of basis points -- small numbers of basis points.

It is still, in our view, too early to conclude whether the market will experience a more significant rebound. But it's really important to note that our US dental equipment and our specialty product sales were strong during the quarter. By the way, our Canadian business is also strong so that impacts the North American performance as well. We believe that the US dental equipment positive trends are positive market indicators. So overall, the US dental market is solid, probably flat from a unit point of view -- very hard to tell. There are some units that are up in the specialty areas. And there's also some price compression because of competitiveness of one or two product categories. But overall the market is solid and very hard to make concrete long term decisions on trends based on one week's performance over another.

But we believe dentists would not be investing in their practices if they didn't feel good about the practices. By the way, we do continue to feel very good about our global animal health business, our US medical business, our international dental business. And overall, we do feel very confident that we are gaining market share across all of our portfolios throughout the world. So it's a long answer to the short question.

Perfect. That was very helpful. And then just in terms of the competitive environment you're seeing in dental in terms of large group or smaller spaces, do you have any additional comments on that area, any changes you've been seeing?

Well the dental market has always been a very competitive market. We have been competing strongly with our major competitors and the smaller competitors for decades. I'm not sure the competition has increased substantially. At the end of the day, we believe we have a very strong proposition to offer to our large customers, our mid size customers and our smaller customers. The proposition we offer is based on a value, a margin generation value that enables us to fund the value-added services, which we believe are unique in the market.

In particular, our software that we offer, interoperability of the software with various devises, our eCommerce platform -- these are all unique. So given that array of value-added offering and coupled with the prices that perhaps are being offered from time-to-time by competitors, we believe we have a very good offering and, more important, do not feel we are in anymore of a competitive disadvantage or advantage to the historical trends. Having said that, we do believe that our value-added service offering continues to improve and, therefore, increases the positive gap between us and our competition.

Perfect. Thank you.

Your next question comes from the line of Jeff Johnson with Robert W. Baird.

Thank you. Good morning, guys. How are you?

Very good. How are you doing?

I'm doing well. Thank you. So, Steve, I want to start with you and then, Stanley, I want to come back to a bigger picture question for you as well. But, Steve, just I would assume you guys can cut your data in certain ways. So just on your October comments, I'd be interested to hear what you were seeing in the North American dental consumables market maybe outside the Southeast where I'm assuming your weather comments are focused. And then I'm just trying to understand what you pulled forward into 3Q. I get it on the promotion side on the equipment side for the North American dental, but it feels like to me you may be talking about some other areas as well. So just want to clarify that.

On the favorable timing -- I'll deal with that first. It's easy. There are three factors. One is the North American dental equipment sales, 13% growth in the current quarter but some of that did pull forward from Q4. The second is favorable timing on influenza vaccine sales. I think as most people know, we can't control sales between Q3 and Q4 and we just had stronger versus last year. We had stronger sales growth in the current quarter versus last years current quarter -- last years third quarter. And the last is it's is some timing of some expenses. And, again, all three of those we wanted to point out that while it was still a strong quarter, what was some favorable timing things that helped Q3 and will [reverse] in Q4.

On your second question, Jeff, I think you know that starting in June the market saw -- and we were unfortunately the first to talk about it on our conference call -- the US dental market showed softness. We saw that softness really continue June, July and August at different rates but not materially different rates. September was a very strong month from us. We were beginning to believe during September -- and I'm talking about consumable merchandise in the US dental market, specifically. We were beginning to believe that it was really just related to the summer and vacations for practices or patients. But it was very strong. And then October was not as strong. It was still a bit better than what we saw earlier. But geographically you had the hurricane impact that negatively impacted things. You had the ADA trade show that was in a different quarter than last year that negatively impacted. So we still believe that October is potentially an indicator of positive signs.

But as Stanley said, we don't have a perfect crystal ball. We would like to see some future data points, equipment sales we would expect to be strong again because of section 179 in Q4. Stanley also highlighted specialty sales to give you a specific on that, specifically on dental implants. And I think everyone knows dental implants typically, because they're high priced products and high priced procedures and very little insurance coverage, when patients are more conscience of their spend, typically that's something that shows weakness earlier. But, again, we had very strong dental implant sales. We had double digit sales growth globally and even slightly higher than that in the US market. So I think both the equipment and the specialty sales are indicators that the market is stable and has potential. But we're still being cautious. But we don't have that perfect crystal ball.

Yes. Understood. That's helpful, Steve. Thank you. And then, Stanley, so the bigger picture question for you is you guys have been great at this long term planning over the years playing out your three year plan as you're talking about 2018 to 2020 now but even the longer term plans than that. So I'd be interested to hear from you -- how do you think the next 3 to 5 years in the dental market, how are you going to have to compete differently than maybe you have over the last 3 to 5 to maybe even 10 years? Obviously DSOs have grown to be a bigger part of the North American market. Rumors out there that maybe some other competitors are trying to get into the North American dental consumable side of the market in that. So just how do you think you have to change the way you compete over the next three to five years?

Thank you, Jeff. Good question. I think we have to, of course, add to the value-added service proposition of Henry Schein. We have many business units that are offering different componentry to the dental market, whether it's products, specialty products, whether it is value-added services, software, eCommerce, different kinds of services from an education point of view, from a practice transitions point of view, from a relationship of schools. We need to go out into the marketplace much more with a one-stop proposition to our customers, including leveraging our businesses outside of dental, namely medical and, to some extent, veterinary. Because they also are dealing with some of the schools and some of the institutions. So what we need to be doing is going out far more with a one-stop value-added service proposition.

We are well positioned. I don't believe anyone has the array of services that we have and, particularly, on a global basis. We need to globalize more of our value-added services, be it in the digital prosthetic field or in the software field and interoperability will be key. So these are the various areas that we will focus on. Your last sentence about additional competition coming into our markets with large accounts, I think that's what you implied, I don't think anything has changed there. There's been a lot of competition in that space. There will always be competition in that space. More of the business will go into the very large accounts but more will go into the mid size accounts.

And I believe that in our strategic vision for the future, we will focus on separate value-added service propositions for different sectors of the market -- the very large, the mid markets and the small. And these will be global propositions because of the same trend that we're seeing around the world and our value-added service offerings will be globalized. Yes, they will be customized to specific market needs but there will be strategic thinking behind these offerings and the services that we will develop or expanding services that we will develop will be utilizing global resources and global solutions -- so with some customization for local needs. So we are very excited about the opportunities we have to further advance our value-added service propositions for specific sectors based on size of the customer and, adding to that, the various value-added service solutions from a specialty point of view as well.

And your text question comes from the line of Michael Cherney with UBS.

Good morning, guys, and thanks for all of the details so far. So I wanted ask a different type of competition question. I know this has been the theme but it seems like the theme across healthcare. I know you guys have been very much focusing on the value-added services you provide, the strong partnerships. Have you seen a trend of people working or are you trying to use price specifically? It seems like it's coming up in other different healthcare sub sectors whether it's in the dental market or even animal health and medical where people are trying to use price specifically as a weapon, trying to come in and take share.

Well of course prices has always played a role, a key role. You've got to be competitive. Price has been an issue in our markets for the 36 years that I've been in the business. So, yes, price is important. But you have to balance price with value-added services. It costs money to develop value-added services. It costs money to fuel the salesforce, although both the value-added services and the fuel source -- force me to be more efficient. We need to have more sales per head and we need to have more sales per dollar invested in value-added services. So the combination of investment in the value-added services and price is what drives competition and the bottom line.

We obviously have to sharpen that as we have done every single year for decades. We have to sharpen, at the end of the day, the price we charge for the value-added service and the products. Competition has always been there. So I'm not sure if there's anything new in the market other than we have to just continue with what we've done for decades, which is to provide a better proposition to our customers. I'm confident that we are well positioned to do that as we bring together our various offerings into a unified offering for our customer base.

Thanks. The fact that nothing is really different I think is the key focal point. So I appreciate the color.

When I say nothing is different, nothing is different in the market in terms of competition. This is the dental market. The medical and animal health markets have been fiercely competitive markets for decades. And I don't expect that to change.

Can I just add one thing please? Mike, you made reference in your question to other areas of healthcare where there is -- my understanding because it's not an area we participate in -- but I assume you're referring to [pharma] wholesaling. And over the last couple of weeks or so there's been a lot of input on very competitive situations. I just want to make sure everyone realizes that's not our market. Sometimes we get painted with a broad brush that we're both in healthcare distribution. But whatever is going on there, and I don't pretend to understand it as well, that is really not what we are seeing in our market. Yes, you have to be competitive. But we still don't believe that you have participants who are doing irrational pricing in order to gain market share. So it's just a different world in the dental -- our segment of medical and animal health.

Steve, that's very helpful clarification. Thank you.

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

Thanks. Just a quick question for Steve. The inventory levels are down again quarter-over-quarter sequentially, which is counter to sort of the historical trend in the business. Was that largely tied to dental and should we expect that to bounce back in the fourth quarter?

Inventory levels were down. The inventory turns were also relatively consistent year-over-year. And when you look at our inventory levels, equipment -- there's less inventory carried for equipment because much of equipment is custom ordered. So you're not -- we do have certain equipment that for standard packages, that will sell immediately to customers. But many time customers are not ordering out of inventory so it's directly related to more of the consumable sides. I would say the better measurement is looking at inventory turns. And that's been consistent. And our goal, quite frankly, is to improve turns over the next year or two.

There's still opportunities in the market from time-to-time to do small forward buy-in. So we take advantage of that where it's financially smart to do so. Typically we're not buying forward any significant period of time. We are dealing with four to six weeks. So it's very short-term buys. But if the market allows us to get a little bit of advantage doing that, then we'll take advantage of it.

That's it. Thanks.

Your next question comes from the line of David Larsen with Leerink Partners.

Congratulations on a good quarter. Can you talk a bit about the growth rate in North American medical? I think it was 7% in the quarter. What was that ex-agency and how did that compare to the previous quarter? Was that a slight deceleration?

Okay, so there was no agency impact that was material in the current quarter. So it's the same number with or without agency because there was no impact. So, yes, you're correct that it was slightly lower than a comparable number, which I think was high single-digits or high single maybe to 10% in the prior quarter. But I don't think there's anything there. It's still very strong sales growth. We're still growing at significantly faster in the market and taking market share. And you have to be careful just specifically looking at that closely one quarter to the next because there are ebbs and flows in winning business that don't perfectly go in a straight line in every quarter. But we're still very pleased with that 7% growth.

Looks good. So there's no noticeable impact from the Affordable Care Act or perhaps some lives coming off of these exchanges? Nothing like that? It will probably pop back up next quarter?

Well I think these exchanges are not really impacting us directly per se. The number of Americans who now have access to primary care physician has gone up over the last year or two or three. More people realize that through the Affordable Act they can access a primary care physician. They understand more and more the value of a primary care physician visit. So that has gone up. We have cautioned though on prior calls that double digit growth in this market is not realistic, can't do that forever. So the kind of growth we're experiencing now, a little bit up a little bit down, is where we can continue to grow for awhile into the future. Mid single-digits to a little bit higher single-digits is I think what you can expect. But beyond that, we may have quarters from time-to-time with a very high rate. But I don't think that is sustainable. And we certainly haven't built our models and our budgets around that.

Okay. Great. Thanks and congrats on a good quarter.

Thank you.

We have time for one final question.

Okay. And your final question comes from the line of John Kreger with William Blair.

Hi. Thanks very much. Steve, can you just clarify that you had strong US dental equipment growth but you did say some that was driven by promotions? I think I heard you say you expect it to be strong in the fourth quarter too but just wanted to make sure. Can we expect that number to be a positive number year-over-year in Q4?

Yes, so it's not unusual for us to have promotions from time-to-time. It's part of what we continually do. We had a very successful promotion for equipment sales that ended at the end of Q3, which is also typical. We typically time our promotions to end at the end of a quarter. It's probably more successful than we expected it to be, which is a good thing I guess. And I guess, John, the thing that we believe will be positive for us is this whole section 179 where practices can deduct up to $500,000 of CapEx. And we believe that will drive additional equipment sales growth in Q4. And we've been saying that all year. But quite frankly, it's really hard to estimate with precision how much of that will occur. But I do think that we'll see benefit there. And I do think that there will be a little bit of impact because we did pull forward equipment sales. But we still expect to have a good Q4 with equipment. But the wildcard is how much of the 179 will actually come to help us in Q4.

Great. That's helpful. So the other question -- if you just think about your US business in total, are you seeing any signs that some of the softness that you saw pop-up in June in dental is rolling into animal health or medical?

It doesn't seem like that. It doesn't seem like that at all, which is also another factor why we believe that this US phenomenon may be more temporary. Temporary may not be measured in a month or two, maybe measured in a longer time period. But when you lock at medical and you look at animal health, we're really not seeing a similar thing occurring in the US. So I think that's a positive indicator. But we're being cautious. While we do expect a little bit of improvement in the US dental market in our guidance, we're not being very aggressive there until we actually see it occur. Because we can't predict exactly when that temporary piece will rebound. And, again, we're still expecting it to rebound but we have to actually see it happen.

Great. Thanks so much.

John, just to add to Steven's comment, I think it is reasonable to expect mid percentage growth, single-digit growth in our animal health and our medical businesses. Yes, we've had quarters where that number has been higher. I'm talking about an internal growth adjusting for agency switchers in the animal health space. But I think mid single percentage growth is reasonable in animal health and medical. Again, we've had higher but we have to build our models based on that, some growth in dental. And that I think is the way we need to project the future rather than build it based on -- build our future based on some of the spikes we've had on the higher side from time-to-time.

Again, we are very comfortable with our businesses. We expect to grow market share across-the-board in each of our businesses in the major sections of consumables, equipment, value-added services, in the case of animal health in both the pharmaceutical side and the consumables side, the disposable side, the diagnostics. And so I think we are well positioned in the entire Company to continue to grow market share across the board. We have a great management team. We are adding to the management team in a couple of areas where we have -- where we feel that there's greater opportunity to grow into newer areas or areas that maybe -- are the newer parts of the economy from our point of view and are very, very excited about the Company. The morale is good.

And overall, I think we're well positioned to develop our 2018, 2019, 2020 strategic plan. We have a clear understanding of what's going to be in there. It's a question of fine tuning. And we're very, very excited about the future. So with that in mind, everyone, thank you for calling in and we look forward to being on the phone with you -- I think in this time is 120 days right? Because it's in February. So if you have any questions, please feel free to call Carolynne Borders at --

631-390-8105.

Or Steve Paladino with the 5915 as the last four digits. Thank you very much and have a great balance of the year and look forward to speaking to you in 2017.

And this does conclude today's conference call. You may now all disconnect.