漢瑞祥 (HSIC) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein Third (sic) [First] Quarter Conference Call.

(Operator Instructions) As a reminder, this call is being recorded.

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

Please go ahead, Carolynne.

Thank you, Diana, and thanks to each of you for joining us to discuss Henry Schein's results for the first quarter of 2017.

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, May 9, 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.

(Operator Instructions)

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

Thank you, Carolynne.

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

Today, we are pleased to report record first quarter financial results.

We believe the markets we serve are generally healthy and growing and that our Global Dental, Animal Health and Medical groups all continue to gain market share and that the trajectory will continue.

We remain quite comfortable with our strategies with respect to gaining market share.

On the bottom line, we delivered strong year-over-year diluted EPS growth for the quarter and are affirming guidance for 2017 diluted EPS.

Given our customer focus and our diverse business model, we believe we are well-positioned for long-term growth.

While some markets will grow faster than others at a particular point in time, we believe we serve attractive end markets with solid opportunities for growth in the years to come as we continue to advance our value-added solutions to help our customers operate better practices, more efficient practices, and at the same time provide quality in care.

Our focus remains firmly on continued financial execution and in that connection, value creation for our shareholders.

In a moment I'll provide some additional comments on our recent business performance and accomplishments, but first, let me turn to Steve who will review our financial results for the quarter.

Thank you.

Okay, thank you, Stanley.

Good morning to all.

As we begin, I'd like to point out that there were no restructuring costs in the first quarter of 2017.

However, our prior year first quarter results included restructuring cost of $4.1 million pretax or approximately $0.04 per diluted share.

I will be discussing our results on an as-reported or GAAP basis as well us on a non-GAAP basis, which excludes the prior year restructuring costs.

We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable a comparison of financial results between periods where certain items may vary independent of business performance and allow for greater transparency with respect to the key metrics used by management in operating our business.

These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures.

You can see Exhibit B on this morning's earnings release for a reconciliation of GAAP to non-GAAP financial data.

So turning to our results.

Our net sales for the quarter ended April 1, 2017, were $2.9 billion, reflecting a 7.7% increase compared with the first quarter of 2016.

This consisted of 8.7% growth in local currencies and a 1% decline related to foreign currency exchange.

In local currencies, internally generated sales increased 5.9% and acquisition growth was 2.8%.

You could also see the details of our sales growth that are contained in Exhibit A of our earnings news release issued today.

If you look at our operating margin for the first quarter of 2017, it was 6.6% and it expanded by 14 basis points compared with the first quarter of 2016.

I'd like to provide some additional details with respect to our operating margin expansion for the quarter.

First, it relates to the inclusion of restructuring cost in last year's first quarter of 2016.

The restructuring cost in the prior year favorably impacted our operating margin comparison by 15 basis points.

And the second item relates to acquisitions completed during the past 12 months and related expenses, as well as switches between agency and direct sales, which combined to negatively impact the expansion by 7 basis points.

So if you were to exclude the net impact of these 2 items, our operating margin expanded by 6 basis points for the quarter.

Our reported effective tax rate for the quarter was 20.7%, and that compares to 30.5% in the first quarter of 2016.

As we mentioned during our Q4 earnings conference call, we have implemented ASU 2016-09, which is a new accounting standard that requires excess tax benefits related to share appreciation of stock grants to be recognized as a reduction in income tax expense in the period in which the awards vest.

As a result, our effective tax rate was favorably impacted in the first quarter, as this is when most of our stock-based awards vest at Henry Schein.

This standard will primarily impact Q1 each year and will have varying effects on our tax rate based on the share price and number of shares that vest.

We previously provided guidance for Q1 2017 stating that, that benefit would result in an effective tax rate in the range of 23% to 24%.

However, the actual benefit was more favorable and our effective tax rate for the quarter was 20.7%.

As a result, we are revising our fiscal year effective tax rate guidance from somewhere in the 28% range down to the 27% range.

Our net income attributable to Henry Schein was $140.7 million or $1.76 per diluted share, and that represents increases of 23.7% and 28.5%, respectively, and that's compared to the first quarter of 2016 GAAP results.

The net income attributable to Henry Schein, Inc.

and diluted EPS for the first quarter of 2017 increased 20.5% and 24.8%, respectively, when compared to the first quarter 2016 non-GAAP results, which excludes the restructuring cost in the prior year.

I'll note that foreign exchange negatively impacted our diluted EPS for the quarter by approximately $0.02 per share.

We're also reaffirming our guidance on a full year basis, but expect Q2 diluted EPS growth to be in the mid-single digit range with growth accelerating in the second half of the year.

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

Our Dental sales for the first quarter of 2017 increased 7.9% to $1.4 billion.

Internally generated sales in local currencies were up 2.9%, acquisitions contributed an additional 5.3% and there was a 0.3% decrease related to foreign exchange.

In North America, our internal sales growth in local currencies was 0.8% and included 2.5% growth in sales of dental consumable merchandise and a 5.5% decline in dental equipment sales and service revenue.

For the past few quarters, our North American consumable merchandise growth rate was impacted by the decision to stop selling precious metals in last year's second quarter.

This decision negatively impacted our North American dental consumable merchandise sales growth in Q1 by approximately 50 basis points.

This impact has now annualized and will not affect our dental merchandise growth rate going forward.

Without this impact, we estimate that the 2.5% growth rate to be approximately 3%.

I think it's also important to note that consumable merchandise sales growth was somewhat favorably impacted by an easier comparable versus Q1 of last year.

This is because the December 2015 holiday week was included in Q1 2016.

That week is generally a slower week for consumable merchandise sales and a stronger week for equipment due to year-end tax incentives.

The decline in North American dental equipment was primarily due to this difficult comparison as well as an acceleration of sales into the previous quarter related to the Section 179 tax incentive.

The difficult calendar comparison will only occur in this Q1, and it's important to note that our current equipment backlog is strong and we anticipate at least mid-single digit growth in Q2 for our North American dental equipment sales.

Our international Dental internal growth in local currencies was 6.8%, included 8.0% growth in sales of dental consumable merchandise and 3.1% growth in dental equipment sales and service revenue.

The international dental merchandise sales growth benefited from the same comparison that I just reviewed, as well as internationally, an extra day in a number of European countries.

This extra day is due to the timing of Good Friday, which is a holiday in many countries, and that occurred in Q1 last year and this year will occur in Q2.

On an overall basis, we believe we continue to outpace the global dental market in Q1, and we believe the fundamentals of our business strategy remain strong.

Turning to Animal Health.

Our Animal Health sales were $812.9 million in the first quarter, an increase of 5.4%.

Internally generated sales in local currencies were up 7.1%, acquisitions contributed an additional 1% and there was a 2.7% decrease due to foreign exchange.

The 7.1% internal growth in local currencies included 5.5% growth in North America and 8.9% growth internationally.

If you look at the sales growth from certain products that switched between agency sales and direct sales in North America, that positively impacted our growth rate by approximately 80 basis points for the quarter.

These results were solid and as we -- and we believe we continue to gain market share on a global Animal Health basis.

Turning to Medical.

Our Medical sales was $598.9 million in the first quarter, an increase of 11.3%.

Sales growth in local currencies was 11.5%, all internally generated, and 0.2% decrease due to foreign exchange.

The 11.5% growth included 11.7% growth in North America and growth of 5.5% in local currencies internationally.

We are pleased with our Medical growth, which was driven by sales increases with several IDNs that we started on-boarding in the middle of last year, as well as strong organic growth from existing customers.

We believe we continue to gain market share in our overall Medical business.

Technology and Value-Added Services sales were $106.0 million in the quarter, an increase of 4.2%.

Sales growth in local currencies was 5.5%, all internally generated, and 1.3% decrease related to foreign exchange.

The 5.5% growth included 3.4% growth in North America and 7.2% growth internationally.

In North America, the 3.4% growth reflected some softness in financial services revenue and this is related to lower North American dental equipment sales.

And as people know, we have leasing revenues related to North American dental equipment, so it follows the overall equipment revenue cycle.

In the international markets, sales of 17.2% were highlighted by strong software revenue in the U.K. and Australia/New Zealand.

We continued to repurchase common stock in the open market for the first quarter.

Specifically, we repurchased approximately 308,000 shares during the quarter at an average price of $162.34 per share, and that equated to approximately $50 million.

This impact of the repurchase of our shares in the first quarter was not material to our EPS.

At the close of the first quarter, Henry Schein had approximately $200 million authorized for future repurchases of our common stock.

We believe we will continue to drive increased shareholder value through a smart capital allocation strategy, which is focused on deploying a large portion of our annual free cash flow to both share repurchases and M&A activities.

If we look at some of the highlights of our balance sheet and cash flow for the quarter.

Our operating cash flow for the quarter was negative $52.6 million, but that is better than the negative $77.8 million in the prior year's first quarter.

And as I think people know, our first quarter cash flow is typically negative due to seasonality of working capital during the quarter.

For the year, we continue to believe we'll have strong operating cash flow.

Accounts receivable days sales outstanding was 40.8 days for the first quarter compared to 42.1 days in last year's first quarter.

Our inventory turns for the first quarter were 5.2 turns and that's essentially unchanged versus last year.

In addition, I'll note that we recently amended our revolving credit facility, increasing the maximum borrowing amount by $250 million from $500 million to $750 million and extended the term through 2022.

This facility supports our long-term internal and acquisition growth strategies, while maintaining a strong capital structure.

I'll now conclude my remarks by affirming our 2017 financial guidance.

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

That guidance reflects growth of 16% to 18% compared to the GAAP 2016 diluted EPS, and 8% to 10% compared to the non-GAAP diluted EPS, which excludes restructuring cost in the prior year.

Let me remind you that fiscal 2017 includes 1 less week than fiscal 2016.

I'll also note that guidance for 2017 diluted EPS attributable to Henry Schein is for current continuing operations as well as completed or previously announced acquisitions, but does not include the impact of potential future acquisitions, if any.

And guidance also assumes that foreign exchange rates for our major international businesses are generally consistent with current levels.

With that, I'd like to turn the call back to Stanley.

Thank you, Steve.

Let me begin my review of our 4 business groups with the Dental group.

We believe we continue to gain market share in our Global Dental business in the first quarter.

In North America, our dental consumable merchandise internal sales growth was 2.5% in local currencies, which was the highest quarterly growth rate in the past several quarters.

We estimate the 2.5% growth rate to be approximately 3% when adjusting for the impact of precious metals in the quarter.

Of course, I think as Steven mentioned, the impact of the holiday, and the holidays actually, and that should be taken into account, but overall, we continue to be very pleased and believe that with our consumable dental sales in North America, and believe that we continue to gain market share in this area.

While North American equipment internal sales in local currencies declined for the reasons that Steven explained, our equipment backlog for the second quarter of 2017 is strong, which we believe indicates a resumption in the year-over-year growth.

We believe that dentists are, in fact, investing in their practices and this, of course, is good for our equipment business.

As part of our ongoing efforts to advance our leadership position in the dental equipment and specialty dental -- specifically the digital dentistry, we are pleased to announce that we entered into a 3-year agreement with Dentsply Sirona effective September 1, 2017, to distribute Dentsply Sirona's full line of dental equipment in the United States.

As you may know, we are the leading distributor of Dentsply Sirona dental equipment in European markets today and we are also a leading supplier of Dentsply consumable merchandise around the world.

Dentsply Sirona and Henry Schein have been excellent business partners for decades, and we are pleased to expand this longstanding and successful relationship.

Of course, our commitment to our dental customers has always been to offer a broad selection of products, including equipment, consumables and value-added services that enable our customers to provide high-quality care to their patients, while realizing greater practice efficiency.

With this agreement with Dentsply Sirona, Henry Schein will offer dentists and dental laboratories in the United States a greater selection of digital dental equipment solutions with a full range of the Dentsply Sirona equipment, including the leading CEREC brand of CAD/CAM products.

The addition of this dental product line, combined with the products manufactured by our other valued equipment supplier partners, furthers the commitment by Henry Schein to providing greater access to the broadest range of high-quality dental equipment products.

Our dental platform is centered on offering our customers choice across a number of high-quality dental equipment systems that most importantly, are interoperable with Henry Schein's practice solutions software platform.

Adding the full Dentsply Sirona equipment product line rounds out an excellent suite of digital technology solutions offered by Henry Schein to help dentists advance their practice in the digital age.

There is a huge opportunity to expand the digitalization of dentistry and we are very, very pleased with our offering, our expanded offering, and the work we've done in the past with those existing suppliers that have provided Henry Schein with digital technology.

In addition to the Dentsply Sirona equipment products, we will continue to represent products from Planmeca, 3shape and 3M, as well as the dental equipment and consumer product lines of our longstanding partner, Danaher, under the KaVo Kerr brands.

Due to the timing of the agreement with Dentsply Sirona and initial trading and startup expenses, Henry Schein expects that earnings related to this agreement will be neutral to our 2017 financial results and accretive and earn in years thereafter, in '18 and '19 and beyond.

We are, of course, excited to expand our partnership with Dentsply Sirona as we broaden our digital dentistry product offering with the highly respected global brands associated with Dentsply Sirona.

We believe that today, together, Henry Schein and Dentsply Sirona will help accelerate the adoption of dental (sic) [digital] dentistry for the ultimate benefit of patients in the United States and actually, around the world.

So we're very pleased with this arrangement, this new arrangement, to deepen our offering of products and very pleased with the relationship that we've had over the years with Sirona in Europe and with Dentsply around the world.

This only aligns our business interests even further, but at the same time, expands the offering that we provide to our customers, and therefore, it is good for the American dentist.

At the recent IDS show in Germany, there were innovative, patient-oriented solutions on display, representing the continued evolution of the integrated digital workflows in the dental office.

Henry Schein announced our expansion of the 3shape dental impression scanner offering in Germany.

We experienced continued year-over-year growth of our Global Dental scanner products during the first quarter of 2017, and we will continue to offer a broad set of CAD/CAM and other equipment solutions offering customers technological advancements that drive efficiency and of course, high-quality dentistry, as we believe the potential for growth over time in this segment of the market, the digital segment, is significant.

So we're very, very excited with the digitalization of dentistry, expansion of our offering, and in fact, our position in the marketplace of advancing the introduction of digital technology to dentists in this country and of course, abroad.

At IDS, we also introduced CAMLOG's CERALOG implant system, including a full range of ceramic implant products.

Ceramic implants meet the growing customer demand for aesthetics, metal-free materials -- the combination of the aesthetics and the metal-free materials, we believe, will be important to implant dentists.

And we believe that CAMLOG is well-positioned to yet introduce another area of advancement in dentistry.

With its two-piece design, CERALOG products enable greater flexibility for restorations with this material.

We believe ceramic implant products have the potential to grow significantly and become a disruptive technology given the benefits to the patient's oral care.

Our ConnectDental and DEDICAM digital platforms support dentists and laboratories in their efforts to integrate digital technology into each step of the clinical workflow for restorative dentistry.

At the core of these platforms, that's the ConnectDental and DEDICAM and actually, the Vulcan platform on the BioHorizons side, is a wide breadth of products with flexibility, of open architecture, so practices can choose the solutions that best meet their needs.

Also, relative to our Dental business, as mentioned on our earnings call -- our last earnings call and of course, in the press releases that we've issued, we recently closed on the acquisition of Southern Anesthesia + Surgical, or SAS as commonly known in the marketplace, which offers surgical supplies and pharmaceuticals to approximately 11,500 oral surgeons, dentists and of course, dental anesthesiologists and periodontists across the U.S. SAS had 2016 sales of $72 million and will be an excellent addition to our product offering targeting the needs of dental surgeons.

We have already good penetration at the Henry Schein level and also at the ACE levels, so we have 3 excellent brands to advance our work with oral surgeons, whether it is in general oral surgery or in the implant arena.

So very, very pleased with the performance of our Global Dental business, very pleased with the expansion of the relationship with the Dentsply Sirona company, and very happy to report good progress with all of our other major suppliers in general, whether it is in the United States or on a global basis.

Now let me turn to the Animal Health side.

While the Animal Health growth in North America did moderate during the quarter, our internal international growth in local currencies was a multi-year high.

Our Animal Health strategy is to deliver excellent solutions and support at prices that reflect the value we provide.

Our customers rely on the products and services we offer, including our robust and clearly differentiated software platforms, all of which facilitate the delivery of quality care by veterinarians throughout the world.

In January, we announced our entry into the Brazilian animal health market with a 51% investment in Tecnew, a privately-held distributor of animal health products.

Tecnew serves about 5,000 customers in Brazil and had 2016 sales of approximately $24 million.

Also during the first quarter, the North American Veterinary Conference was held in Orlando.

There, we did launch a new Samsung-branded diagnostic chemistry instrument with bidirectional functionality and a full body of digital radiography solution from Canon.

We also introduced our new Sparkline software dashboard, which integrates with our practice management software to identify key performance metrics such as revenue growth and customer retention.

These products were well received, as we endeavor to offer our customers a prescriptive approach to specifically -- that specifically targets the needs of their practices.

We believe that our Animal Health business in the United States and abroad continues to do well, working well with our major suppliers and are confident that we will continue to gain market share on this side of the business.

Now let me talk about the Medical business a little bit.

Our Medical business delivered double-digit sales growth in the first quarter.

This reflects particularly strong patient traffic to physician offices, particularly related to the late flu season, as well as our continued execution in serving the market, as it is consolidating among large group practices, including the integrated delivery network.

We are well-positioned to help primary care practices and ambulatory surgical centers operate efficiently so our customers can focus on patient outcomes.

We believe that promoting wellness and prevention is key to the future of improving the health care landscape.

And that is precisely the part of health care that our customers are engaged with.

In line with helping physicians provide better clinical care, we recently announced an exclusive distribution agreement with Rijuven to sell its CardioSleeve diagnostic device to medical practitioners.

CardioSleeve is the world's first stethoscope attachment that provides electrocardiogram and heart data via Bluetooth for instant analysis, another reflection of the digitalization of health care, an area that we are highly committed to advancing.

This product is an excellent example of our expansion of innovative medical devices in our portfolio that we are helping doctors provide effective treatment and more efficient care.

We expect to continue to offer our customers an expanding suite of innovative medical device solutions.

Again, very pleased, not only with our Dental and Animal Health performance, but on the Medical side as well.

Technology and the Value-Added Services components.

Although we saw some softness in the North America Technology and Value-Added Services internal sales growth for this quarter, we were pleased with our performance in the electronic services sales area, most of which is reoccurring revenue, as we continue to penetrate our customer base with these value-added services.

As Steven mentioned, our Technology and Value-Added Services sales had strong double-digit growth, and was, of course, slightly impacted by the level of financial services revenue, but in general, we are very pleased with the performance of this group, and specifically, as it relates to the recurring revenue, electronic commerce part of the business.

And of course, enhancing our technology solutions offering is an important initiative as we empower our customers to do more with the tools we provide them to help boost productivity and yes, improve efficiency in the practice.

So before we take the questions, I'd like to note a couple of other highlights for the quarter.

In February, we celebrated, together with American Dental Association Foundation, the 15th annual Give Kids A Smile program.

This is an initiative through which dental teams provide free oral care and education to underserved children across the U.S. It is estimated that nearly 300,000 underserved children receive free oral health screenings, education, treatment under this program each year.

Care is delivered by more than 30,000 dental volunteers, including 8,000 dentists, who use oral health care products donated by Henry Schein and our suppliers.

We're very pleased with this longstanding partnership with the American Dental Association, a true public-private partnership, which at the end of the day, advances the needs of society, while enhancing the Henry Schein brand.

In March, Henry Schein was recognized by Ethisphere Institute as a 2017 World's Most Ethical Company, marking the sixth consecutive year we received this recognition.

The Ethisphere Institute is a global leader in defining and advancing the standards of ethical business practices.

It is truly an honor to be recognized among some of the world's most respected businesses for our commitment to ethical business practices and of course, corporate social responsibility.

With those comments, operator, we are now ready to take questions.

(Operator Instructions) Your first question comes from the line of Jon Block of Stifel.

I'll try to keep it to 2 real tight ones.

Steven, the first one on the tax rate of 27%, I believe that gives you roughly an extra $0.10 for the year, but not moving the guidance.

So maybe if you can just give some thoughts on the level of conservatism for the year and is that 27% tax rate the right one to extrapolate out to '18 and beyond?

And then Stanley, I'll take a shot here in terms of when you mentioned net neutral to 2017, the deal with Dentsply Sirona, but accretive in 2018, any sense of the level of accretion in '18 and beyond, and if not specific in terms of EPS, just maybe some more detailed thoughts there?

Okay, I'll take the first part of your question.

So on the current year, still early in the year.

Versus our guidance, it's probably about $0.06 improved versus our guidance.

Remember, we said 23% to 24% effective tax rate going into the quarter for Q1, came in at 20.7%.

So that represents approximately $0.06.

I would say we have a relatively wide range of $0.13 in our guidance.

It's early in the year.

There are a number of puts and takes, including foreign exchange, that we need to keep a watchful eye on.

So at this point, we felt that the prudent thing was just to reaffirm guidance and not to change guidance at this time, and let's see how the year progresses.

With respect to our tax rate going forward, so it's a little bit difficult to quantify.

I would expect that we should still see a similar benefit in future years.

But remember, it depends on 2 key factors for us.

First factor is the stock appreciation, which is hard to estimate, and the second factor for us is, because a number of our shares are performance based, how many shares actually vest based on the performance.

So it might not be quite the same impact in future years, because we had a very favorable on both of those counts this year, but we would expect that there would still be a tax benefit in each Q1 going forward.

Again, it may not be quite as great as what we saw this year.

So on the impact of adding the Dentsply Sirona line, first, this year, there will be significant expenses in bringing onboard a comprehensive line.

This will entail, of course, a tremendous amount of education and training, taking our salespeople and our technicians out of the field.

And of course, adding some additional team members for capacity.

So the impact of that is factored into the guidance that Steven has rendered.

As it relates to next year and beyond, we remain very excited with Henry Schein's key strategy to advance digital dentistry on a global basis.

We think that digital dentistry will increase the efficiency of the practice, while at the same time, providing better quality in health care, better quality of oral care in the dental practice.

We cannot give you the direct impact on the expansion of the strategy, and we believe that by adding the Dentsply Sirona equipment line to our business, we will, in fact, expand our strategy and expand our strategy even faster as we implement the -- as we expand the line and implement further our plans on digital dentistry.

But I think it would be premature to provide a direct impact on the line.

And in fact -- on introducing the line -- I don't think it's a good idea for us to talk about the impact of any specific supplier rather than talk about the category, and we will, of course, report back, to the extent we can, on the impact of digital dentistry on our overall business.

And that has been pretty good for the last few years.

We have introduced many, many dentists to digital technology, specifically through our scanner lines, and I might add, through full chair-side units as well, while at the same time servicing the needs from a digital transformation point of view of dental labs throughout the world, where we believe we are the biggest provider of products, that is, for the dental labs.

Your next question comes from the line of Robert Jones, Goldman Sachs.

And just to follow up, appreciate you are somewhat limited, obviously, Stanley, what you can say about the new agreement with Dentsply Sirona.

But I just wanted to maybe ask a more strategic question around the new arrangement.

Should we anticipate any change in your go-to-market strategy?

If I think about the U.S. market kind of post you having access to this product line, there are arguably less differentiation between your product portfolio and your largest competitors.

So just curious if there's any change that you foresee in the sales force and their go-to-market strategy?

And I guess just related to that, should we expect any disruption in your sales force as they take on this new portfolio?

I don't -- I think it's a very good question.

But I don't think much changes from a go-to-market strategy.

We have been building our digital technology capacity for the last 4 years, perhaps even 5 years, and our goal is to provide the best comprehensive solution to dentists.

Of course, there is a significant tie-in to our practice solutions software, which over the years has moved from being an accounting system to a clinical solution.

There's a lot going on in that area, we've invested heavily.

A lot of those expenses are run through the value-added services component of our P&L, which is shown separately.

We've added the Ascend software in the area of cloud-based software, these have been significant expenses, and they all tie in one way or another to our digital equipment.

Interoperability is something that's been important for Henry Schein on the equipment side now for several years.

So I don't think much changes in our strategy.

We will continue to add more resources into this area.

We have added more resources over the last few years and we'll continue to do that.

Of course, by expanding our offering, we will now have a more competitive offering, although I might hasten to add that our existing suppliers provide us with good products, but the CEREC brand is clearly the innovator, perceived as the innovator, and has been an innovator in this space for a long, long time.

We do well with the CEREC brand in Europe, but I think it is important to realize that Henry Schein is committed to differentiating ourselves through the value-added services we offer to our customers.

So there's a lot more than a particular brand or a particular product.

Of course, we're happy to have, excited to have the Dentsply Sirona equipment line, but it's the value-added service and the tie-in with our practice solutions and other value-added services that is the differentiator.

I don't think there will be disruptions in our sales force.

This is an exciting product to add, but it will not be significant or material as it relates to our total Dental business of $6 billion or so.

So it is an important line, we're excited.

We think we can partner very well with Dentsply Sirona.

We have a lot of other manufacturers that we do well with.

Everybody in dentistry, every manufacturer understands the importance of digital dentistry.

Everybody is committed to this.

And we look forward to working with a broad array of suppliers, albeit the Dentsply Sirona equipment line is an outstanding line, and I don't think we will have disruption, either with our suppliers or with our customers.

And I think we will have steady growth in this area of digital dentistry as we've experienced over the last years.

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

So Stanley and Steve, let me just ask one other question on the Dentsply relationship, if I could.

Steve, you were talking about it being neutral for the back half of this year, accretive thereafter.

You will have expenses early on.

Just from a gating standpoint, should we think of the expenses really kind of coming in third quarter and then some revenue offsetting the expenses in the fourth quarter?

So just want to make sure we set up our models appropriately or between the third quarter expense and fourth quarter benefit, maybe mix?

So remember, the agreement does not start until September 1, so no revenues can be recognized by us before September 1. So I would say that -- and it'll take a little bit of time for us to build an order book on the product line.

So I don't think right out of the box, we're going to be going at 100%.

I would say that we'll also see some expenses in the same quarter, starting a little bit before the September 1 date, to train the sales force and do things like that, but we'll start seeing it in the same quarter.

But we're not looking at really any significant quarterly impact for Q3 and Q4.

We're trying really to have it relatively neutral in each quarter, although it might be a little bit negative in the first quarter, Q3, versus Q4.

We haven't given guidance going forward, other than we feel comfortable it will be accretive.

And I think you have to give us a little bit of time to see, later this year, how we do in order to really have some specificity on the impact of it.

While we're very excited, remember, we also support other manufacturers, so there will be a net impact that we have to look at for us.

There are product categories that we're selling other manufacturers.

But the net impact to us, though, should be positive and again, we're pleased to have the Dentsply Sirona line in place now.

Your next question comes from the line of John Kreger, William Blair.

How did your dental implant line do in the quarter?

And then Stanley, maybe more broadly, what kind of -- what were your observations coming out of IDS?

Just curious what you view as sort of any key innovations coming out of that show that you think could be the more profound growers for the industry over the next 3, 4 years?

Steven will give you information on the implant line to the extent we actually provide that data, because we generally do not provide category growth.

Having said that, Steven will provide some color.

Please remember that we have an implant business and then we have businesses that provide products around the implant.

And when you compare performances of us to others, remember that the implant companies are showing a broad line of products, not only implants, but products around the implant.

So it's very hard to compare our performance.

But generally, we are very pleased with our oral surgery business, the implants for bone regeneration products and the products around the implants.

The second question was...

Just strategically on the implant line, how the market is doing.

Yes, well, I think the market for implants is growing quite nicely throughout the world.

I would say that it's pretty good in the U.S. Europe is a bit more muted, but the developing world is growing significantly.

So I think it's a good area to be in.

And perhaps the most exciting part of the implant business, and I would say that with all the specialties, is the investment by specialists in digital technology, be it in the prosthetic side or in the imaging side.

So specialists generally are investing more in their practices because, of course, they have the earning power, and this is driving our equipment sales throughout the world.

And just to give you a little color on our overall performance for implants, and this is excluding -- it's really just the implants, not the products around the implants.

On a worldwide basis, we grew in the mid-single digits, or slightly higher than that overall, with stronger growth in the U.S. and slightly less growth internationally.

And overall, we think that we at least maybe outpaced the market by a little bit in the quarter.

You also asked about IDS.

I think there was the customary amount of new products.

I don't think it was extraordinary from the point of view of new products.

From a sales point of view, it was -- it happened to be very good for Henry Schein Germany and the countries around Germany, because generally orders are placed from -- by dentists from those countries.

It's not an order booking business on a global basis.

Of course, there are distributors and manufacturers that come to the show from around the world, but from an order point of view, it's really a Germany, Austria and maybe The Netherlands and a little bit extra.

And we did well from that point of view.

Of course, the area of greatest focus was the CAD/CAM area.

We saw some advances in scanners, molds, and I think all more or less in line with what we shared on previous calls.

The whole CAD/CAM area is getting better in terms of capabilities, efficiencies, and it's becoming more affordable.

So from that point of view, there was quite a lot showing there.

From a Henry Schein point of view, we're very pleased with our advancements, the offering, an expanded offering, the technology advancements on the implant side.

But overall, I would say, it was a solid meeting from an attendant's point of view.

Pretty okay from products, but I wouldn't say a revolutionary show from a product innovation point of view.

Your next question comes from the line of Steven Valiquette, BofA Merrill Lynch.

Stan and Steve, impressive results and also congrats on the new Sirona dental equipment deal, which I also have a question on.

So I guess at a high level, is there perhaps any extra color that you're able to give around the magnitude of under-penetration of CEREC, in particular, into the legacy Henry Schein distribution customers in the U.S. relative to the overall U.S. market penetration rates for CEREC.

I'm sure you've done plenty of studies on this, but just wondered if you're able to share anything.

Sure.

There are more studies on this area than are probably fact, but it is clear that it is a highly under-penetrated area.

I think that the number of dentists that either have a scanner or a full service is relatively small.

It's probably under 20%, some say it's as low as 15%, some say it's 17%.

It doesn't matter, because it's 80% of dentists that don't have digital prosthetics in any way, any form at all.

So we think it's an exciting a market as the digital imaging market, and we've done very well in that market, with lots more to go, because you still have a lot of dentists that have wet X-rays in their practices.

So digital imaging is an exciting market.

It's a bit more penetrated, actually, quite a bit more penetrated than the prosthetics, but the prosthetics is really an open market.

And for those that even may have bought a CEREC, it may have been bought with an older version.

So there's lots of opportunity for selling CEREC to customers that don't have it and to customers that wish to have a newer version.

But at the same time, we also see opportunities for some of the other manufacturers on the scanning side, scan-only side, and that's not only in the dental practice, but in the dental lab practice, and there will be exciting opportunities also in the milling arena.

Anticipate that there will be some exciting opportunities from a number of manufacturers in the milling area, and also, I'm sure, from Sirona.

So this is in general a very exiting category, and the advancement in blocks is exciting so the digitalization of dentistry, which we spoke about 6 or 7 years ago from a prosthetics point of view, is really going to be an area that is going to help Henry Schein grow our Dental business in the future as we advance the connectivity between our practice management software, digital imaging, digital prosthetics and improving the entire work stream in the office to drive more efficiency and better health care.

Your next question comes from the line of Stephen Hagan of Deutsche Bank.

In international dental, did you see a pause in the equipment sales ahead of IDS and equipment sales were still up 3% despite this?

Or was the strength because fewer dentists waited for IDS than expected?

And also, were there particular geographies that drove the strength in international dental?

I'll let Steven answer the second component.

I mean, we had, as I think I mentioned, we had a very good IDS from the order-taking point of view.

But I would say that, that was specifically related to Germany and to Austria, a little bit in The Netherlands.

Because generally, customers don't come to buy from beyond those markets.

Perhaps a little bit from Eastern Europe, but not much.

Overall, we had a good quarter in the equipment business in our international markets.

I think that, that was mostly related to countries outside of the Germanic-speaking countries where we are doing well with equipment in Europe.

So I think you have to bifurcate the market a bit, you have to look at the Germanic countries and the rest of Europe.

And there was, of course, in the Germanic countries, although it was a decent quarter, and I think at least from our point of view, we expect to have decent sales in the second quarter in the Germanic countries and don't really see much of a pause in our growth in our international business in general.

Yes, and I'll just reiterate what Stanley said, really, the softness which was probably related to IDS was in the Germanic countries, but it was offset somewhat -- more than somewhat, was offset by other parts of our international dental business.

And actually, that's typical.

You don't typically see people going to IDS to buy equipment from, for example, the U.K. Really, it's Germany and the surrounding countries where the purchasing habits of buying equipment, although people may come from all over the world just to see the different types of equipment.

So again, we're expecting a bit of a pickup in Germany, but that will be muted by some of the other countries that were very strong also in Q1.

We do have time for one more question.

David Larsen of Leerink Partners.

It's Matt in for Dave.

Just wanted to ask about a couple areas you mentioned were relatively slower.

Animal Health, is there anything to read into the growth moderation there or is that just sort of seasonal in North America?

And then any other color on the relative softness in Technology for the quarter, or is that also just seasonal or cyclical?

I don't think you should read anything into the numbers in the Animal Health arena in North America.

There was some switching around some suppliers, one particular supplier between us and a competitor.

There was some switching between agency and GAAP booking of the full sales.

We continue to believe that we're doing very well in the companion area of Animal Health, from a consumable point of view, general consumables, pharma, equipment.

The holidays, there's so many different things that go into this.

But I think if you take a look at any particular 4 quarters in our Animal Health, you will see that I think we're gaining market share and the business is doing very well.

We did have our national sales meeting during the quarter.

It was a very good sales meeting.

I don't know the extent at which that impacted sales, but overall, Animal Health is doing well.

On the Technology side, the core leading indicator we look at is in the e-commerce arena and the various kinds of transactions we undertake on behalf of our customers.

I think that's all very good, solid.

You have to also look at the financial revenue, primarily leasing from our financial services business, which is a little bit weaker, taking into account that our sales on a comparable basis on equipment were a little lower.

But I would not read anything into it.

And nor would I assume that double-digit sales growth on the Medical side of our business is normal.

I think we are very pleased with our internal growth for the company at 5.9%, which take a guess, is anywhere between 2x to 3x the market growth.

We're gaining market share in all of our businesses on a global basis.

Very pleased we are managing our investment in the business very carefully.

We're optimistic about the future, specifically as it relates to increasing the value-added service offering.

And so we were very pleased with the business in general.

It's hard to get every single number perfectly aligned every quarter, but overall, the bottom -- the sales, the internal sales, the operating margin and the EPS growth is something that we're very pleased with.

We're working on our strategic plan now for 2018, '19 and '20, so many opportunities and the challenge is always about determining what we're not going to do rather than what -- capitalizing on specific opportunities.

Henry Schein has so many opportunities in Dental, Medical, Animal Health space and we're excited about the future, and our management team is excited to be advancing our strategies and morale in the company is great.

And we continue to look forward to creating shareholder value for our shareholders.

So thank you all for calling in.

If you have any questions, of course, Steve Paladino is always available as our CFO at (631) 843-5915 and Carolynne Borders on the Investor Relations side.

Carolynne?

(631) 390-8105.

And I think we're all going to be out at the Bank of America Conference on Tuesday next week.

Look forward to seeing those investors that are going to be there.

If you're not there, I believe it will be webcast.

So we'll try to provide as much information as practical and appropriate.

And we're very, very excited with the addition of the Dentsply Sirona line, but also so grateful and appreciative of those manufacturers that have worked with us to get us to where we are.

We believe we have the deepest bench in management and really a broad array of products and solutions within our Dental, Medical and Animal Health markets.

So thank you very much for calling in.

This concludes today's conference.

You may disconnect at this time.