漢瑞祥 (HSIC) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein fourth-quarter and full-year 2016 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 Vice President of Investor Relations.

Please go ahead, Carolynne.

Thank you, Robin, and thanks to each of you for joining us to discuss Henry Schein's results for the fourth-quarter and full-year 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 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, February 21, 2017.

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 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, and thank you for joining us.

We are indeed pleased to report record financial performance for the 2016 fourth quarter, and of course, for the full year.

For the quarter, our sales increased by 9.5% with internal sales in local currencies, excluding the estimated impact of the extra week -- that's the extra selling week of what we estimate to be 4.2%.

And on the bottom line, we delivered strong year-over-year diluted EPS growth for the quarter of 10.9% on a GAAP basis, and on a non-GAAP basis, 12.6%.

For the year, net sales are $11.6 billion, were up 8.9% compared to 2015, with 6.7% internal growth in local currencies, excluding the estimated impact of the extra week.

While diluted EPS growth was 8.8% on a GAAP basis or 10.9% on a non-GAAP basis.

Coming off a successful year, we are affirming guidance for 2017: diluted EPS that represents growth of 16% to 18% compared to 2016 GAAP-diluted EPS of growth of 8% to 10%, compared to 2016 non-GAAP diluted EPS.

I believe the message you will hear today is that the end-markets we serve are experiencing consistent growth, and we are focused on continued execution and delivery on our financial objectives.

Of course, we did have a slight slowdown in the growth in the middle of last year, in the middle of the summer or early part of the summer of last year, which we still cannot explain.

But we believe that at this point in time, the end-markets we serve are, in fact, experiencing consistent growth.

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

But first, Steve will review our financial results in a bit more detail.

So Steve, over to you.

Okay, thank you, Stanley, and good morning to all.

As we begin, I'd like to point out that our 2016 fourth-quarter results include restructuring costs of $16.1 million pretax, or $0.15 per diluted share.

And our 2015 fourth-quarter results include restructuring costs of $12.4 million pretax, or $0.11 per diluted share.

For the full year, our full-year 2016 results also include restructuring costs.

Those restructuring costs are $45.9 million pretax or $0.42 per diluted share.

And full-year 2015 results include restructuring costs of $34.9 million pretax or $0.32 per diluted share, as well as a one-time income tax benefit net of non-controlling interest of $3.8 million, or $0.05 per diluted share.

When I discuss our results as reported on a GAAP basis, and also on a non-GAAP basis, the non-GAAP basis will exclude the restructuring costs and the one-time tax benefit from the prior year.

We believe that non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparisons of financial results between periods, [with] certain items may vary independent of business performance.

And allow for greater transparency with respect to 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 the corresponding GAAP measures.

You can see Exhibit B in this morning's earnings release, that has a complete reconciliation of those non-GAAP adjustments.

Okay, let me also point out that the fourth quarter of 2016 included one additional selling week compared with the fourth quarter of 2015.

This week is the holiday week between Christmas and New Years.

We report on what's called a 52-53 week fiscal year, ending always on the last Saturday in December.

The next time our results will include an extra selling week will be in 2022.

So in order to facilitate more meaningful comparisons, we will provide a separate estimate.

We are providing a separate estimate of the impact of the extra week on our sales growth, as well as providing internal sales growth in local currencies excluding that impact.

Okay, so turning to our results now, net sales for the quarter ended December 31, 2016 were $3.1 billion, reflecting a 9.5% increase compared with the fourth quarter of 2015.

Our internally generated sales in local currencies were up 4.2%.

Acquisitions contributed 1.3%.

There was a 1.5% decrease due to foreign exchange.

And the growth attributed to this extra week was estimated at 5.5%.

You can see all of these details of our sales growth contained in Exhibit A in our earnings news release.

Our operating margin on a GAAP basis for the fourth quarter of 2016 was 6.9%, and contracted by 18 basis points compared to the fourth quarter of 2015.

There are three key elements that negatively impacted our GAAP operating margin that I'd like to discuss, and these three key elements negatively impacted operating margin by about 30 basis points in total.

The first item relates to acquisitions completed during the first 12 months and their related expenses, as well as switches between agency sales and direct sales in our animal health business.

Which combined to negatively impact the contraction by 7 basis points for the quarter.

Secondly, influenza vaccine sales this year had a lower margin compared to the prior year, which negatively impacted our operating margin by 15 basis points.

And the third item relates to an increase in restructuring costs in the fourth quarter of 2016 versus the same period last year.

And that negatively impacted the contraction by 8 basis points.

If you were to exclude the net impact of these three items, our operating margin expanded by 12 basis points.

Our reported GAAP effective tax rate for the quarter was 28.4%.

That compares to 30.1% in the fourth quarter of 2015.

The tax effect of the restructuring costs recorded in the fourth quarter increased our effective tax rate by about 20 basis points in 2016, and about 30 basis points in 2015.

Our full-year 2016 effective tax rate was 28.8% on a GAAP basis.

And again, the effective restructuring costs recorded for the full year increased the effective tax rate by another 20 basis points in 2016, and 30 basis points in 2015.

For 2017, we expect our effective tax rate to be in the 28% range.

I'd also like to note that in 2017, we are implementing a new accounting standard called ASU 2016-09.

This new accounting standard requires excess tax benefits associated with stock-based compensation, to be recognized as a reduction in income tax expense in the period which the stock awards vests.

As a result, we expect our effective tax rate to be favorably impacted in 2017, and this will primarily occur in the first quarter, as this is when most stock-based awards that Henry Schein vests.

This impact will occur each year in Q1, and will have varying effects on the annual effective tax rate.

Therefore, because of this, we expect our Q1 effective tax rate to be in the range of 23% to 24% -- this is for Q1 only.

And we still expect that this Q1 impact is included in our estimated effective tax rate for the full year, which on a full-year basis, will remain in that 28% range.

Our net income attributable to Henry Schein Inc on a GAAP basis was $139.2 million or $1.73 per diluted share.

That represents increases of 7.1% and 10.9%, respectively, compared with the fourth quarter of 2015.

Excluding restructuring costs, non-GAAP net income attributable to Henry Schein for the fourth quarter was $151.3 million or $1.88 per diluted share.

And that represents increases of 8.6% and 12.6%, respectively, compared with the fourth quarter of 2015, also on a non-GAAP basis.

I'd like to point out that foreign exchange negatively impacted our diluted EPS for the quarter by approximately $0.02, and this was partially offset by share repurchase benefit of approximately $0.01 for the quarter.

So let's now look at some detail on our sales results for the fourth quarter.

Our Dental sales for the fourth quarter of 2016 increased 7.7% to $1.5 billion.

Internally generated sales in local currencies were up 1.6%.

Acquisitions contributed an additional 1.7%.

There was a 1% decrease due to foreign exchange.

And growth attributed to the extra week was estimated at 5.4%.

We look at North America, our North American internal growth in local currencies was 2.2%, and included 1.9% growth in sales of dental consumable merchandise, and 2.7% growth in dental equipment sales and services revenue.

As I mentioned last quarter, there was some acceleration of our equipment sales from Q4 to Q3.

And that was associated in part with promotional activities that we discussed on the last conference call.

It's also important to note that we saw strong growth in the North American consumable merchandise and equipment sales in December, even excluding the estimated impact of the extra week.

I'd also like to reiterate that our growth rate was impacted by the decision to stop selling precious metals earlier this year.

This is something we've also talked about on the last few conference calls.

This decision negatively impacted our North American dental consumable merchandise sales growth in the quarter by about 50 basis points.

And this will continue for one additional quarter, first quarter of 2017, at which time, it will annualize.

International dental internal growth in local currencies was 0.7%, included 2.5% growth in sales of dental consumable merchandise, and 3.9% decline in dental equipment sales and service revenue.

This decline was primarily due to a difficult prior-year comparison in international equipment sales and service revenue.

We also expect a softness in international dental equipment sales to continue in Q1 as we approach the IDS trade show, which is in late March, and anticipate an acceleration of equipment sales thereafter.

On an overall basis, we continue to believe we outpaced the global dental market in Q4, and believe the fundamentals of our business strategy remain strong.

Turning to Animal Health sales, they were $837.8 million in the fourth quarter, an increase of 10.8%.

Internally generated sales in local currencies was up 8.2%.

Acquisitions contributed [0.4]%.

There was a 3.4% decrease due to foreign exchange, and growth attributed to the extra week is estimated at 5.6%.

The 8.2% internal growth in local currencies included 10.3% growth in North America and 6.3% growth internationally.

When normalizing for animal health results to account for the impact of certain products switching between agency sales and direct sales, that 8.2% internal local currencies was 7.8% growth, and included 9.3% growth in North America.

We believe this normalized growth is a more meaningful reflection of the ongoing performance of our North American animal health business.

These were solid results, as we believe we continue to gain market share, both domestically as well as overseas.

Our Medical sales for the quarter were $621.1 million, for the fourth quarter.

And that was an increase of 10.6%.

Sales growth in local currencies was 4.4%, all internally generated, with 0.1% of small decrease due to foreign exchange, and growth attributed to the extra week estimated at 6.3%.

It's important to note that timing of influenza vaccine sales negatively impacted the medical sales growth by 1.2%.

And if you exclude this impact, our sales growth in local currencies was 5.6%.

Of this 4.4% growth, 4.5% was in North America, and growth of 0.9% in local currencies internationally.

We are pleased with or Medical growth, as we also believe we gained market share in this business unit.

Technology & Value-Added Services sales were $112.2 million in the quarter, an increase of 19.6%.

That consisted of internally generated sales in local currencies of 8.5%, acquisitions contributing an additional 9.8%, and a decrease due to foreign exchange of 1.9%.

And finally, growth attributed to the extra week is estimated at 3.2%.

Of that 8.5% internal growth in local currencies, 7.4% was in North America, and 13.9% growth internationally.

The Technology & Value-Added Services internal sales growth in local currencies was highlighted by solid growth in both our software services revenues in North America, as well as internationally.

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

More specifically, we repurchased approximately 1.3 million shares during the quarter at an average price of $156.10 per share, and that equated to approximately $200 million.

The impact of this repurchase on shares for the fourth quarter was positive by about $0.01 per share.

For the full year of 2016, we repurchased $550 million of our stock, representing 3.5 million shares at an average price of $158.88 per share.

And while this was above our originally stated goal, we saw an opportunity to be more aggressive when our stock price declined.

Our share repurchase program continues to demonstrate our long-term commitment to create further value for shareholders, and reflects our confidence in long-term prospects of the business.

At the close of the quarter, Henry Schein had about $250 million authorized for future repurchases of our common stock.

And we continue to believe our capital allocation strategy, which deploys a large portion of annual free cash flow to both repurchases and acquisitions, continues to drive increased shareholder value.

Let's briefly look at our balance sheet and cash flow.

Operating cash flow for the quarter was $264.5 million.

That compares to $298.3 million last year.

For the year, the operating cash flow was over 600 million -- $615.5 million, to be exact.

Our CapEx for the year was $70.2 million, and that results in free cash flow of $545.3 million for the year.

As I mentioned earlier, we are really pleased to have exceeded our goals related to cash flow for the year.

Accounts receivable days outstanding was about 41.3 days.

That compares to 39.3 days last year.

Inventory turns was 5.5 turns for the quarter.

That compares to 5.6 turns last year.

And finally, I'd like to conclude by reaffirming our 2017 guidance for the year.

Our diluted EPS attributable to Henry Schein is expected to be $7.17 to $7.30 for 2017.

I'd like to point out that, if the US dollar continues to strengthen, we may come in at the lower end of this range.

And obviously, we can't predict well what's going to happen with the US dollar, but we just wanted to point out, we do have sensitivity to the US dollar strengthening.

We would also like to note that we have concluded our restructuring program.

We do not expect to have any further restructuring expenses in 2017.

And as a result, there's no separate guidance on a non-GAAP basis, since we will not have any non-GAAP EPS for the year.

That guidance reflects growth of 16% to 18% compared to 2016 GAAP diluted EPS, and 8% to 10% compared to 2016 non-GAAP diluted EPS.

As always, the 2017 diluted EPS attributable to Henry Schein is for continuing operations, as well as completed or previously announced acquisitions, but does not include the impact of potential future acquisitions, if any.

As I said earlier, guidance assumes foreign exchange rates are generally consistent with current levels.

So with that overview, let me turn it back over to Stanley.

Thank you, Steven.

Let me begin my remarks with a few highlights of what we believe was a successful -- actually, we believe quite a successful 2016.

We achieved net sales of $11.6 billion in 2016, up 8.9% from the prior year.

Internal sales in local currencies grew by 6.7% when you exclude the estimated impact of the extra week.

Diluted EPS growth was 8.8% on a GAAP basis, or 10.9% growth on a non-GAAP basis.

Operating cash flow for the year was $615.5 million, and exceeded GAAP net income by more than $108 million.

We announced seven strategic acquisitions in 2016, with a total investment of approximately $229 million, as we continue to expand our geographic presence and enhance our product offering.

These acquisitions had combined trailing 12-month revenue of approximately $270 million.

The acquisitions included dental market expansion into Poland, Japan and Canada -- where we are already very strong -- as well as an expanded presence in Australia, New Zealand, the UK and the Netherlands, for our practice management solutions offerings.

To sum it up, we believe that 2016 was quite a solid year.

Now let me review our four business groups, starting with Dental.

We believe the North American dental consumable merchandise market is improving, as we saw particularly strong growth in December and January.

We also continue to see increased capital equipment investments in dental practices, which drove strong US -- and actually North American -- equipment sales in December.

January is typically not a strong month for equipment sales, following year-end tax incentives here in the United States, such as Section 179.

On the whole, we believe we continue to gain market share in our global dental business.

We are looking forward to the bi-annual international dental show known as the IDS, in Germany next month.

As we expect the continued promotion of digital workflows for general dentistry, as well as for dental specialties, including implants, dentists, orthodontists and those performing endodontic treatment.

We believe practices and laboratories will benefit from the introduction of a broad array of digital products, and in particular, enhanced scanning solutions and lower-priced milling machines.

As many of you may know, digital dentistry is a top priority of our strategic plan for both North America and internationally.

We continue to experience robust sales in our digital scanner solutions in North America, in line with our focus and open architecture.

In addition, we offer full chair-side systems.

And over time, we will seek to broaden the options we offer to dental practices, to support product innovation and the proliferation of this important technology.

We believe we are well-positioned as market adoption continues to evolve.

Strategic acquisitions remain a cornerstone of our business.

We recently announced the acquisition of a company by the name of Southern Anesthesia & Surgical, or SAS.

SAS is highly regarded provider of surgical supplies and pharmaceuticals to approximately 11,500 oral surgeons, dental anesthesiologists and periodontists across the US, as well as those GPs undertaking specialty procedures.

They had, for the year 2016, about $72 million in sales.

SAS enjoys loyal, longstanding customer relationships with oral surgery practices in the US.

In bringing together SAS and our ACE surgical supplier business, two well-known and respected brands, we will offer the market a broad array of products focused on the unique needs of dental surgeons.

In mid-January, we announced that we completed the acquisition of a majority ownership interest in Dental Cremer, a distributor of dental supplies and equipment in Brazil.

Dental Cremer had last year, the full 2016, net sales of approximately $145 million in US dollars, and serves nearly 90,000 dental practitioners in Brazil.

You may recall that we first entered the Brazilian market in 2014 with our investment in Dental Speed Graph.

We believe we are well-positioned to benefit from the market growth in Brazil in dentistry -- which actually is growing quite nicely -- that is fueled by a growing middle class and aging population at the same time.

We are pleased to welcome Dental Cremer to Team Schein as we build scale in this important emerging market.

Now to Animal Health.

Overall, the global animal health market is healthy and is growing, particularly in the companion animal segment, where we have expanded opportunities to deliver value-added solutions.

And we believe that we continued to gain market share during the fourth quarter.

Today we are well-positioned to leverage attractive opportunities in these animal health markets.

And in the companion segment, we are focused on providing greater selection of high-margin products, much as we do in the dental and medical markets.

While these markets are competitive, our strategy is to deliver high-quality solutions and support at price points that fairly reflect the value we provide.

We believe our customers value the products and services we offer, including our robust and differentiated software platforms -- all of which facilitate the delivery of high-quality care to the animal health market.

We recently attended the North American Veterinary Conference in Orlando, where we launched a new Samsung-branded diagnostic chemistry instrument with bi-directional functionality, the full-body digital radiography solution from Canon, and our new spot line software dashboard.

Which integrates our practice management software to identify key performance metrics, such as revenue growth and customer retention.

These additions and advancements continue to build on our solutions-based products and services that enable our customers to grow and run, and actually operate a more profitable practice.

We remain highly optimistic about our opportunities in the practice solutions area in the animal health space, and including the offering of diagnostic equipment and the related connectivity to our software.

It, of course, took us a little time to get our offering together, as we relied on a particular manufacturer in the past.

But have gained excellent momentum, and are very excited about offering a wide variety of options to the animal health practitioners -- who really do appreciate our expanded offering, not only in the US, but globally.

Before we move on to Medical, I would like to highlight our recent announcement of a 51% investment in Tecnu, a leading distributer of animal health products in the State of Rio de Janeiro in Brazil.

Tecnu serves nearly 5,000 animal health customers, and had 2016 sales of approximately $24 million.

This acquisition marks Henry Schein's entrance into the animal health distribution market in South America.

We look forward to building on the strong reputation that Tecnu enjoys in Brazil, as well as on the experience that we've gained through our entry into the Brazilian market on the dental side a couple of years ago, as discussed earlier on.

Now, the Medical.

Medical sales growth was 5.6% in the fourth quarter, excluding influenza vaccine sales as well as the estimated impact of the extra week.

While this quarterly growth rate has moderated from prior growth rates, as we indicated it would, we believe it reflects solid market share gains, and in particular, among large group practices, including the IDN networks, the Integrated Delivery Networks.

We believe the medical markets we serve remain healthy, despite considerable industry speculation about the potential changes to healthcare coverage in the US under the new Administration.

We believe any healthcare reform will broadly preserve a commitment enabling access to health insurance for Americans.

The debate is largely about who pays for it and the administration of access to care.

While there is still uncertainty, we do not expect to see a significant decline in the number of covered lives associated with coverage changes, as it relates to visiting a primary care physician in the ultimate care and the non-acute care markets.

In addition, we believe that over time, the trend towards treatment in the ultimate care setting will continue, as will the emphasis on wellness and prevention.

This is directly associated with primary care physician visits, which is a large part of our medical business.

This positions us well, as our focus is on serving these core medical customers.

I would like to highlight a recent addition to our executive management team with Bridget Ross, whose has joined us in the role of President of our Global Medical Group.

Bridget was previously at Johnson & Johnson, where she spent more than 28 years in sales, marketing and general management activities, overseeing innovations in medical device solutions.

At Henry Schein, Bridget will be responsible for overall leadership of our Global Medical Group.

We have focused primarily over the last half a dozen years on the domestic market in the ultimate care physician space.

And with Bridget joining us, we are hopeful now and expect to expect our global presence and add specialty areas in a similar manner to the way we have grown in the dental and the animal health space.

But our priority was to focus on IDN business, large-group practices in the medical arena domestically.

We will still, of course, focus on this area.

But we felt that there is a large opportunity to follow the same strategies we followed in our animal health and dental businesses of expanding globally, and at the same time, adding specialty components to our offering.

Bridget will be part of Karen Prange's team.

Karen is our Executive Vice President and Chief Executive Officer of our Global Animal Health, Medical and Dental Surgical Groups -- another executive who joined Henry Schein in May of last year.

Bridget will be supported by a seasoned highly capable team on the medical side, in the US.

The sales and marketing operations of that team, led by President Brad Connett, who has done an outstanding job for Henry Schein for well over two decades, and will include an international team.

Brad and the medical team in the US -- thus, our international team on the medical side -- have helped drive our success in this important market over many years.

This is indeed a pure transformational change and consolidation in the global medical industry, and Henry Schein is committed to helping lead customers through this transformation.

We believe we do have unique capabilities that enable us to be of tremendous value, provide tremendous value to those medical practitioners practicing in the ultimate care markets.

And for those kinds of facilities that work in the primary care and specialty areas outside of the acute care area, outside of the drug store, in the long-term care markets.

As market, technological and democratic forces converge to create a unique business opportunity for Henry Schein, we are indeed delighted that Bridget has come onboard to help us to make the most of these opportunities.

So let me conclude with my business overview of Technology & Value-Added Services, which also had a solid quarter, with high single-digit internal growth in local currencies.

Enhancing digital platforms for the whole of our growing customer base is an important priority for Henry Schein.

The core of our software solutions across various platforms seeks to better-connect customers with their patients, and improve overall practice efficiency.

The dual commitment reinforces our value to their practices.

As part of our strategic plan, we will continue to develop and acquire innovative solutions to drive intra-operability with devices as well as the cloud in order to efficiently manage the clinical workflows in our customers' offices.

These are indeed exciting times, and Henry Schein remains well-positioned to advance our customers' needs, as they seek to automate their practices and take full advantage of the digital economy that has rapidly emerged -- and will, in fact, advance even further in the next few years.

While we have an excellent footprint with our practice management solutions in North America for dental and animal health markets, we believe there remains significant opportunity for us to expand our technology platforms in other markets and geographies where we have a more limited presence.

Through our business development efforts, we will continue on expanding our technology presence globally, and continually seek to evolve our cloud-based systems, to better-integrate our solutions for expanding practices and enterprises.

Before we take your questions, I'd like to highlight a few awards and recognitions Henry Schein has received during the fourth quarter.

First, Henry Schein was named the Best Animal Health Product Provider for 2016 by Global Health & Pharma magazine, a UK-based healthcare publication.

This was their inaugural animal health award.

The awards were created to recognize companies that promote health and welfare of animals, and focus on companies that explore innovation, technologies, scientific achievements and wildlife conservation.

We are honored to have been recognized for our commitment to serve the needs of those who safeguard animal health around the world.

Additionally, we were honored to be chosen, among the top performers in the healthcare technology and distribution, as part of Institutional Investor's 2017 surveys for All-American Executive Team.

The awards in the CEO, CFO and IR program categories speak to our commitment to open communication and transparency with our investors, as well as our commitment to driving business execution and delivering value to our shareholders.

So there's a lot that's happening at Henry Schein.

Very pleased with the performance last year, given the challenges we experienced from the dental side in the early part of summer last year, and the foreign exchange challenges we experienced.

But overall, the net bottom line was quite good.

We are well-positioned to have, again, a good 2017.

Our management team remains excited, the morale in the Company's 21,000 Team Schein Members around the world remains high, and we are excited about the future.

So we have some time for questions.

(Operator Instructions)

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

Hi, thanks.

This is Ethan on for Jon.

A quick question, and then a follow-up.

A lot of focus has been on the North American dental market recently, but I'm hoping you can comment on what you're seeing on the international consumable side.

You grew 2.5% in Q4, and the growth has been about in the 2% to 3% range for the past few years.

How does that 2% to 3% compare with the underlying market?

And what is the right long-term growth rate you'd expect from international dental consumables?

Sure.

I would say, similar comments internationally.

Markets are stable.

They are consistently growing.

Historically, we've always seen the international markets grow a little bit slower than the US market.

They are a little bit more comparable at the current time.

We absolutely believe we're gaining market share in international dental.

So I would say that, steady as she goes, but I think the consistency in the market should continue going forward.

Now of course, that's a consumable comment.

You know, we do have lumpiness related to equipment and the IDS show that we talked about.

So IDS, typically people delay purchases in this current quarter, to see new models and new show specials for equipment later in the quarter, and that turns into sales in Q2 and Q3.

So we'll see lumpiness there on international dental equipment sales.

We remain quite optimistic with our international business.

I think to reiterate what Steven said, if you leave aside the lumpiness on European -- and particularly, German and the Dutch region sales -- I think we're expecting a decent year in both international merchandise and equipment.

Got it.

And then Steven, you kept the guidance range unchanged.

Would it be fair to say that the buyback in Q4 may have given you a few cents benefit relative to when you initially guided, but this was largely offset by incremental FX headwinds since the November guidance?

Yes, I think that's exactly right.

We weren't expecting to buy back as much as we bought back.

In hindsight, it turns out to be even a very good short-term decision.

But longer term, we expect it to be even a better decision, because we do have high confidence in the business.

But foreign exchange has been a headwind.

Its been a headwind for 2016.

It's still a headwind for 2017.

And because of the unpredictability of foreign exchange, those two kind of counteract each other.

Got it, thank you.

Okay.

Your next question is from the line of Steve Valiquette with Bank of America.

Thanks, good morning, Stanley and Steve.

So just looking at the strength you mentioned in the December and January, that [delicasool] obviously is encouraging.

Just curious if there's any more color on that, whether you can break that down into DSOs as well as individual practitioners?

Or maybe more on one side versus the other?

Or is it just really across the board?

Just curious for more color on the trends you're seeing there.

Thanks.

Yes, I would say there's no significant variance that I've seen between large DSOs and middle market.

It seems to be more across the board, although we personally are seeing stronger growth in our middle market.

That's an area that we have keen focus on.

But I think the overall market is relatively consistent.

As you know, Steve, we've seen periods of time, so we're optimistic where December and January will continue, but there's no certainty in that.

We've seen times where, again, lumpiness in sales.

But right now, things seem to be pointing to a slight acceleration in the US dental market.

And remember -- just let me add one other thing, Steve -- that's a consumable comment.

Equipment, on the other hand, because of the strong December that we had, and because of Section 179, which typically pulls sales forward from Q1 into Q4, you have to expect that Q1, you'll see lighter equipment sales because of that tax benefit that pulled forward.

But that's a bit of a timing thing that should occur each year now going forward, given that the Section 179 is now permanent.

Got it.

Okay, great, thanks.

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

Thanks, guys, good morning.

Just a couple quick ones here.

So Steve, as you're starting to see these December and January improvements in the North American consumable side, anything now you can look backwards and say: oh, the change seems to be coming here?

And maybe the slowdown from June through November anyway was caused by something -- any better ideas or thoughts on what caused the slowdown to begin with?

You know, we're still a little bit perplexed as to why it occurred, but Stanley actually, I think, in his comments, said something similar to that.

There's really no additional data points that we've seen that give us any greater clarity as to why it happened.

We just know it did.

And again, hopefully, the long-term prospects of the dental market will continue to be favorable.

Demographics are still in our favor.

People taking better care of their oral healthcare, aging population -- all of that.

So I wish, Jeff, I had a better answer, but we really don't have more clarity on that.

Yes, understand.

And I apologize.

I've been jumping between calls here, so I might have missed Stanley's comments.

But Stanley, just on the medical side -- and I'm going to show my age here, but I think about 10 years ago or so, you guys dipped your toe into some specialty areas.

I don't remember why oncology and dermatology ring a bell, but maybe it was other areas.

But then you saw that there was a big pharma component, some other things that you didn't like as much maybe, and got out of those areas.

It sounds like now going down the specialty route again in medical.

So can you compare and contrast what you learned a decade ago in that, and how this time it might be different?

Yes, it was a good question.

So the two areas we exited were low-margin cancer ontological pharmaceuticals.

That's more in line with what the big drug wholesalers do.

They deal with high-volume products, lower margins than what we do.

There's not much we could have added to those kinds of practices through our field sales consulting methodology.

Likewise, we exited the specialty pharma area -- again, a low-margin part of the pharma business.

The areas we have been doing well in are areas such as dermatology, also quite a bit of a private practice arena.

The aesthetics area, the obstetrics and gynecology area, the areas that have -- of course, pharmaceuticals -- but have a nice componentry, from our point of view, of disposables and equipment.

And those are the areas we will focus on.

I don't want to give you the impression that we were not focused on those areas, because actually they contributed nicely to our growth over the last six years or so, and have been quite profitable.

But we anticipate advancing our investment in those areas in the years to come, in particular into devices, rather than low-margin pharmaceuticals.

Understood.

Thank you.

Your next question is from the line of Robert Jones with Goldman Sachs.

Thanks, this is Nathan Rich on for Bob this morning.

Stan, going back to your comments on the dental equipment business, you talked about broadening the offering here.

And obviously there's the change coming with how [Sorona] will be distributed in the US.

At this point, have you guys seen this have any impact at the practice level?

I'm just wondering if maybe we could see some dentists either delaying decision-making, or maybe your salesforce doesn't push as hard, as they are expecting to have a broader offering to sell later this year?

Well, it's a good question.

I don't know whether we will carry one particular manufacturer's product or another, whether we will expand, whether we will not.

What I do know is that there is a desire to acquire more digital equipment in the office, both in terms of digital imaging and digital prosthetics, chair-side, and also I might add, on the digital prosthetics in the lab area arena.

We have an extensive offering of equipment in the digital imaging space and the digital prosthetic space.

So we are well-positioned and have been well-positioned to grow our market share, as we have executed well in these areas, and also we're executed well in these areas.

So I don't think we're as much dependent on the particular product.

We would like to have as wide an offering as possible.

We are committed to open architecture and have done well with the offerings that we actually have, whether it's been in the digital space, or I might add, in the traditional laboratories, the chairs, the units, the lights, the compressors, et cetera.

So we believe we are well-positioned to continue to grow our market share.

I don't believe there's been any holdback.

I think we had a very good fourth quarter.

I might just remind you that in the first quarter of 2016, we did have exceptional equipment growth.

I think the number was something like 13.5%.

So you need to take that into account.

When you look at the first quarter of 2017, it's not going to be possible, I think, to have those kinds of double-digit growth -- and I'm talking about the North American market.

Having said that, and excluding the quarterly lumpiness, I think we are well-positioned with our offering, not dependent on any one manufacturer.

And indeed, I think we would like to carry all lines, to the extent that manufactures would like to work with us.

But we are committed to open architecture.

Let me remind you that we did exceptionally well in growing our market share on the equipment side in the United States, without having the number-one market share product in units, chairs and lights.

We added that product offering, and did well.

But I don't think our salespeople held back any equipment sales anticipating us at some point taking on the number-one player in the chair, units and lights.

So bottom line, long answer, we have a great offering.

We have a great sales marketing service group on the equipment side.

We are well-positioned.

Of course, we do want to have as wide a product offering as possible, but we need to respect the notion that we are open-architecture and we'll sell everyone's product.

We are a fiercely competitive Company, and we'll fight for every dollar of sales, using the products that we have in our bag.

And have done well with that philosophy for decades.

Thanks for that.

And Steve, if I could just ask a quick follow-up on operating margins.

Just wanted to see if the 53rd week had any impact on operating margin for the quarter?

And then as we think about margins for next year, would you expect that same-store margin target that you have of about 20 basis points?

Is that right in terms of the way we should think about potential for margin improvement next year?

Just looking for a better understanding of the different swing factors as we think about the model.

Sure.

You're correct, for Q4, the extra week was a little bit negative -- I haven't calculated the exact amount, but was a little bit negative to overall Q4 operating margins.

Again, the main reason is, it's a light week for sales, and with 2/3 of our expenses being compensation and compensation-related, you get a full week of compensation.

So margins were a little bit lower there.

On full-year 2017, yes, our guidance does assume at least 20 basis points of operating margin expansion.

And it's correct to note that, that's on what we like to call a same-store basis -- meaning, it excludes the impact, if any, of any acquisitions that could be positive or negative to that number.

But we do believe that there's still room for margin expansion going forward.

Okay, great.

Thanks for the questions.

Okay.

Your next question is from the line of Lisa Gill from JPMorgan.

Thanks.

It's actually Mike Minchak in for Lisa.

You guys talked about the strong growth in the US dental consumables in December and January.

Did you also see that momentum continue into February?

And then can you remind us what you factored into your 2017 guidance?

Are you assuming an ongoing recovery in dental in the US dental consumables market?

Just trying to understand the degree to which you've built some conservatism into the guidance.

Sure.

You know, we'll start with the last part first.

The 2017 guidance really only assumed a very modest improvement in end-market conditions -- not just dental, but for all of our markets.

So it was more consistent, but with some slight improvements.

February, we didn't comment on, because when you start segmenting months and looking at it in a particular week-by-week basis, you really could get misleading results.

But we wouldn't have said December and January unless we believe that there was potential for it to continue.

But looking at the specific weeks, it's too short a period to really draw conclusions from.

Got it.

And then just wondering if you could talk about the competitive landscape in dental, especially as it relates to large versus smaller customers?

Have you seen any changes in the competitive dynamics in either of those segments recently?

You know, this is probably the most asked question from analysts, other than, how's the market doing.

And I just want to reemphasize what we've been saying for years.

The dental market is competitive.

It's a market that is driven by a combination of price and service offered -- in other words, value.

I don't think anything has changed.

We have a good market share in the large practices.

We have, we believe, the most outstanding offering, with tremendous experience in that area.

And yes, every now and again, a competitor will go in with a price that's below ours, and we will not match those prices.

Because we believe our offering is of higher value, and we cannot and will not dilute the value that is ascribed to our offering.

So I would be understanding that Henry Schein is competitive in the space, highly competitive in the space, has always been competitive.

There has always been competition.

The competition hasn't increased at all.

It's the same competition we've had for decades.

Sometimes words are said, sometimes there are announcements about particular accounts won.

Henry Schein does not announce each one of our accounts that we win.

We don't discuss our strategy precisely.

We talk about customers about that, and that's our job.

Our job is to provide value to our customers.

I believe we continue to do a good job in that area.

And there is no more competition today than there was 10 years ago.

The competition wants our business and we want our competitions' business.

It's a fiercely competitive market.

Henry Schein will continue to provide great value to our customers, and we will continue to increase the value-added that we deliver to our customers each day.

So it's a pretty stable market, highly competitive, as its always been.

And there's no time at all to sit back and relax.

There never has been a time to sit back and relax.

And we are committed to growing our market share in all areas in dentistry.

We have a good track record in that regard, and we anticipate that, that, track record will continue.

Got it, appreciate the comments.

We have time for one more question, and that question is from the line of Michael Cherny with UBS.

This is Alan in for Mike.

Thanks for taking the question.

In the Medical segment, can you talk about what is driving the share gains in large-group practices?

Are you still seeing benefit from the agreement with Cardinal, or is there something else happening there?

I'm not sure our share gains have ever had anything to do with any particular supplier relationship.

Yes, we did acquire a book of business from Cardinal.

That was a one-time step-up as a result of that acquisition, excluded from internal growth numbers.

And we have been executing for the past, I think it's now seven years, on a strategy to gain market share amongst large-group practices.

It was about increasing our capabilities through both additional management and focus, and through additional value-added services.

Very similar, I might add, to what we did in the dental arena, when we started our special markets group 21 years ago.

So it's about focus, it's about management, and it's about the value-added services, and actually the product offering.

That has resulted in our market share growth in this space.

We do well, we are well-positioned, and we anticipate doing well, but I would not say that it's because of any one supplier.

We have a very good supplier relationship with Cardinal today.

They are very helpful.

But they also supply our competitors with products.

So I don't think it's any one way or another related to any specific manufacturer.

Got it.

Thank you.

Robin?

And do you have any closing remarks?

Okay, yes.

Thank you, Robin, and thank you, Carolynne and Steven, and everyone for calling in.

Again, we are very excited about where we are at Henry Schein, our plans for the future, our four major business units.

Each one has great business plans for this year -- our global Dental group, our global Animal Health group, our global Medical, and of course, our practice solutions and financial services, a value-added services group.

We are in the process of working on our 2018, 2019 and 2020 strategic plan.

I don't expect any major directional change.

I do expect additional focus in certain areas and movement of resources, but this was all anticipated through the restructuring we went through at the end of 2015 and through 2016.

So as I said right at the beginning of the remarks, our management team is excited, the morale in the Company is great, and we have so many opportunities to expand the business, both through internal growth and through acquisition growth.

Obviously acquisitions happen when they happen -- they are lumpy.

But our pipeline remains decent, and we anticipate advancing on the acquisition side, without any commitment as to specific dates for any specific amounts of capital.

We will use our capital as we have now for quite a while -- to continue to buy back some shares, make some acquisitions, and of course, invest in the business.

We are well-capitalized, we have cash that we need to execute.

And again, very excited about the future.

So thank you for calling in.

We'll be back in about 60 days, at which time we will be able to report on the Chicago mid-winter meeting, the IDS meeting will just have occurred, and likewise, I think we will be able to give you a better temperature on the animal health market and on our medical business.

So thank you very much.

If you have any questions, please feel free to call Carolynne Borders in our Investor Relations department at 631-390-8105.

Thank you.

This does conclude today's conference.

You may now disconnect.