漢瑞祥 (HSIC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Henry Schein's Second Quarter Conference Call.

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

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

Please go ahead, Carolynne.

Thank you, Andrea, and thanks to each of you for joining us to discuss Henry Schein's results for the second 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, August 8, 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.

I'd like to start today's call by making a few high-level comments.

We are pleased with the overall sales results of the second quarter of 2017 in each of our global Dental, Animal Health and Medical businesses.

We delivered solid earnings per share growth as we continued to implement our strategy of growing the business organically and through acquisitions.

We strongly believe that our strategic framework is built on a commitment to help our customers operate more efficient and successful practices and has worked well for us for many, many years.

As a result, many of our products, technologies and solutions hold leading positions in our markets.

And our corporate focus remains on delivering consistent earnings growth over the long term while investing in our business for the future that will continue to be driven by health care innovation.

So we are particularly pleased with our strong second quarter of 2017.

Look forward to providing you with additional color on the quarter, and of course, responding to any questions that the investor community may have.

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

But first, Steve will review our financial results.

Steve?

Okay.

Thank you, Stanley, and good morning to all.

As we begin, I'd like to point out certain items impacting our second quarter results.

Our Q2 2017 results include a litigation settlement expense of approximately $5.3 million pretax or $0.04 per diluted share.

And our Q2 2016 results include restructuring costs of $20.4 million pretax or $0.18 per diluted share.

I will be discussing our results as reported on a GAAP basis and also on a non-GAAP basis, which excludes the litigation settlement in the current quarter as well as the prior year restructuring costs.

We believe that the non-GAAP financial measures provide investors with useful information about the financial performance of our business, enable comparison of financial results between periods where 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 GAAP measures.

You can look at Exhibit B in this morning's earnings release for a complete reconciliation of our GAAP and non-GAAP disclosures as well as the reconciliations being provided on our Investor Relations sections of our website.

Okay, if we look to our results for the quarter, net sales for the quarter ended July 1, 2017 were $3.1 billion, reflecting a 6.5% increase compared with the second quarter of 2016.

This consisted of 7.7% growth in local currencies and a 1.2% decline related to foreign currency exchange.

In local currencies, internally generated sales increased 4.4% and acquisition growth was an additional 3.3%.

Again, details of our sales growth are contained in Exhibit A of our earnings news release issued this morning.

Operating margin for the second quarter of 2017 was 6.9% and expanded 60 basis points compared with the second quarter of 2016.

That's on a GAAP basis.

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

The first relates to the inclusion of restructuring costs in the second quarter of last year.

These restructuring costs in the prior year favorably impacted our operating margin comparison by 71 basis points.

Second, the litigation expense incurred in the second quarter of this year negatively impacted our operating margin by 17 basis points.

And third, the third item relates to acquisitions completed during the past 12 months and related acquisition expense, which combined to negatively impact the expansion by 6 basis points.

There was no material impact between agency sales and direct sales during the quarter.

So if you exclude these 3 items, the net impact of these items, our operating margin expanded by 12 basis points for the quarter.

Our reported GAAP effective tax rate for the second quarter of 2017 was 28.7%.

And on a non-GAAP basis, it was 29%.

This compares to 27.4% in the second quarter of 2016, also on a non-GAAP basis.

So as we have previously stated, we implemented ASU 2016-09, which will lower our overall tax rate for the year.

And the greatest impact has been seen in our first quarter results.

So with that, we continue to believe that our full year effective tax rate on both a GAAP and non-GAAP basis will be in the 27% range.

Net income attributable to Henry Schein for the second quarter of 2017 was $136.1 million or $1.71 per diluted share, representing increases of 13.3% and 17.1%, respectively.

And that compares with the second quarter of 2006 (sic) [2016] GAAP results.

On a non-GAAP basis, again excluding the litigation expense in the current year and the restructuring costs in the prior year, our net income was $139.3 million or $1.75 per diluted share and represents increases of 2.9% and 6.7%, respectively, when compared with the second quarter of 2016.

I will also note that foreign currency exchange negatively impacted our diluted EPS for the quarter by approximately $0.01 per share.

Let me now provide some detail on our sales results for the second quarter, starting with Dental.

Our Dental sales for the second quarter of 2017 increased 8.4% to $1.5 billion.

Internally generated sales in local currencies were up 3.1%.

Acquisitions contributed 6.3%.

And there was a 1% decrease due to foreign exchange.

Our North American internal sales growth in local currencies was 3.8% and included 0.8% growth in sales of dental consumable merchandise.

We expect to continue to see low single-digit merchandise growth for the remainder of the year.

And that's in line with current end market growth rates.

Our dental equipment sales and service revenue grew by 14.8%.

This strong growth was due in part to an easier comparable versus Q2 2016 in which our internal sales growth for equipment was 2.7% in local currencies.

It's also important to point out that we would expect to have a difficult year-over-year comparison in Q3 as Q3 of last year was positively impacted by a sales promotion, which helped contribute to internal sales growth of 13.3% in local currencies last year.

Turning to international.

Our international Dental internal growth in local currencies was 2.0% and included 1.4% growth in dental consumable merchandise and 3.6% growth in dental equipment sales and service revenue.

While we saw double-digit equipment sales growth in Germany, in part driven by the IDS trade show, this growth was partially offset by lower growth in the Australian and Italian markets.

On an overall basis, we believe we continue to outpace the global Dental market in Q2 and we remain confident in our business strategy.

Our Animal Health sales for the quarter were $891.3 million, an increase of 4.4%.

Internally generated sales in local currencies were up 5.8%.

Acquisitions contributed an additional 0.9%.

And there was a 2.3% decrease due to foreign exchange.

That 5.8% internal growth in local currencies included 5.9% growth in North America and 5.7% growth internationally.

Sales growth from certain products switching between agency and direct sales in North America positively impacted our growth by approximately 80 basis points in the second quarter of 2017.

Medical.

Our Medical sales were $571.4 million in the second quarter, an increase of 6.1%.

Internally generated sales in local currencies were the same, 6.1%.

And acquisitions contributed 0.1% and foreign exchange offset that 0.1% -- by a slight decrease of 0.1%.

The 6.1% internal growth in local currencies included 6.3% growth in North America and a slight decline of 0.5% internationally.

We are very pleased with our Medical growth, which was driven by strong organic growth from existing customers.

We believe we are continuing to gain market share in our Medical business.

Technology and Value-Added Services sales were $108.5 million in the quarter, an increase of 1.4%.

Internally generated sales in local currencies were up 2.2%.

Acquisitions contributed 0.6%.

And there was a 1.4% decrease due to foreign exchange.

If we look at that 2.2% growth overall, it included 0.3% growth in North America and 12.4% growth internationally.

I think it's important to understand the components of that 0.3% growth in North America.

And it did include very strong growth in our North American financial services business, which is related to strong dental equipment sales.

And the financial services business grew by 13.6%.

However, the sales growth was negatively impacted by a difficult comparison in the prior year related to revenue associated with the Department of Defense contract that was completed last year and had very strong revenue in Q2 last year.

This negatively impacted our growth rate by about 135 basis points.

In addition, we had some lower sales primarily related to discontinued lower-margin products in our value-added services mix, which negatively impacted our sales growth by approximately 230 basis points.

It's important to note that, that was a decision that we made, to stop selling some of these lower-margin products.

And it had very little impact on the bottom line.

Excluding the impact of both of these items, our North American Technology and Value-Added Services internal sales growth in local currencies was approximately 4.0%.

International markets for technology sales growth was 12.4% and was highlighted by very strong software revenue growth in the U.K. as well as solid growth in our financial services business.

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

Specifically, we repurchased approximately 289,000 shares during the quarter at an average price of $173.16 per share or approximately $50 million of cash outlay.

The impact of the repurchase of shares -- this impact on the second quarter was immaterial.

At the close of the quarter, we had approximately $150 million authorized for future repurchases of common stock.

And we believe we will continue to drive increased shareholder value through our capital allocation strategy, which is focused on deploying a large portion of our annual free cash flow to share repurchases as well as strategic M&A.

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

Our operating cash flow for the quarter was $228.7 million, which compares to $277.2 million last year.

And we believe we'll continue to have strong operating cash flow on an annual basis.

Our accounts receivable days sales outstanding was up slightly to 41.3 days versus 40.8 days last year.

And our inventory turns was 5.6 turns, which is essentially unchanged to last year.

I'll conclude my commentary on 2017 financial guidance.

We expect our full year 2017 diluted EPS to be in the same range as we previously disclosed except for the $0.04 litigation settlement expense.

So for 2017, we expect GAAP diluted EPS attributable to Henry Schein, and again that includes the litigation settlement expense of $0.04, to be in the range of $7.13 to $7.26.

And that represents growth of 15% to 17% compared with GAAP diluted EPS of $6.19 for 2016.

The prior GAAP diluted EPS range was $0.04 higher at $7.17 to $7.30, again because the $0.04 litigation settlement expense.

On a non-GAAP basis, our diluted EPS, again excluding the litigation expense, that's the only exclusion for the non-GAAP basis, is expected to be the same, $7.17 to $7.30, representing growth of 8% to 10% compared with the non-GAAP diluted EPS of $6.61 for 2016.

Let me remind you again that 2016 non-GAAP numbers exclude the restructuring costs.

Note that we expect GAAP diluted EPS for Q3 to be in the high single-digit range, that's on a GAAP basis, and in the mid-single-digit range on a non-GAAP basis.

Fiscal 2017, again as a reminder, includes 1 less week than fiscal 2016.

Note also that our 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 any potential future acquisitions.

Our guidance also assumes that foreign exchange rates are generally consistent with current levels.

So before I turn the call back to Stan, I'd like to highlight a really great honor that was bestowed upon Stan recently that I think he would be too humble to acknowledge himself.

In May, Stan was recognized by Chief Executive magazine as its 2017 CEO of the Year.

This is a huge honor as he was selected by a notable group of large-scale company CEOs, including AT&T's Randall Stephenson, Marsh & McLennan's Dan Glaser and NCR's William Nuti.

Stan is in really good company with previous CEOs who were winners, including in the past, Bill Gates of Microsoft, Jack Welch of GE, Andy Grove of Intel.

And I think Stan will tell you that he only accepted this award on behalf of all of our 21,000 Team Schein Members as he views this as a recognition of the exceptional work of our team across the globe.

And the success of any organization hinges on its most important asset, its people.

I know he truly believes this.

And Stanley, we are really very proud of you.

So with that, I'll turn it back to you.

Thank you, Steven.

It was, indeed, an honor to be recognized by Chief Executive magazine.

And I, of course, share this award with all of our Team Schein Members across the globe.

So we before we go through highlights for each of the business units, I'd like to note that we believe we gained market share during the second quarter in each of our global Dental, Animal Health and Medical businesses.

This has been the case for quite a while.

We are confident that our strategies, the way we execute our strategies position us well to continue to gain market share in each of our 3 verticals across the globe.

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

In North America, dental consumable merchandise internal sales growth in local currencies was 0.8%.

Going forward this year, we believe the North American consumable market for Dental will continue to grow at a slightly higher rate than inflation with little unit growth.

And I believe we've said this for a while.

In line with the broader macroeconomic trends, we believe the domestic market should realize unit growth improvements over time.

We're also quite sure about that.

Regarding the North American dental equipment, we're quite pleased with the robust 14.8% internal sales growth in local currencies as dentists continue to invest capital in their practices in order to improve productivity and profitability.

As Steven noted, the strong growth in the second quarter was partially impacted by easier prior year comparable.

However, we did generate 14.8% internal sales growth in dental equipment.

And we believe that the dental equipment market remains quite strong in North America and by the way for that matter, in most markets around the world.

Our steadfast commitment is to offer our global dental customers a broad selection of products, equipment and of course, value-added services that enables our customers to provide high-quality care to their patients while realizing greater practice efficiencies.

As part of this commitment, beginning September 1, that's next month, the end of this month, 2017, we look forward to offering the full range of DENTSPLY SIRONA dental equipment across North America, including the leading CEREC CAD/CAM restoration system.

Our dental platform gives customers choices across a number of high-quality dental equipment systems, including high-tech equipment that is compatible with Henry Schein's various software offerings.

Of course, this has been a key part of our growth strategy, ensuring that the equipment we sell and some of the consumable and of course, the small equipment, is tightly connected with Henry Schein's well-established installed software customer base within its small customers, medium-sized customers, large customers or indeed the dental schools, where we have a significant presence.

In addition to DENTSPLY SIRONA equipment, we will continue to represent the complete lines from key suppliers, including 3M, 3Shape, A-dec, Danaher, Ivoclar, Midmark, Planmeca and many, many others.

Of course, we're excited to add the full range of DENTSPLY SIRONA products but also equally excited to continue to gain market share for our entire manufacturer base, especially those that have been with us for so many years and helped us get to this point.

We are, therefore, in an excellent position to meet our customers' needs.

We expect the demand for digital dental technologies to continue to increase.

And we said so for a while, our key strategy being the digitalization of the dental office in the coming years as it was in the '90s, when we introduced practice management software in a significant way to our customer base.

We also believe that distribution will open up in the short term in order to effectively serve customers that wish to advance efficiency and quality of care in their practices.

In other words, open architecture will become far more important in the dental industry in the years to come, not only for us but for others serving the dentists.

This will only serve to provide greater adoption of these innovative solutions.

And we remain comfortable that although this is a highly competitive market and every dollar of business that we get, we have to fight for, we believe that we are well positioned to gain market share in the digital technology space and in fact, overall in the dental space, whether it's in consumables for dentists or equipment for dentists or for that matter, in the laboratory space globally and specifically in the United States and generally in North America.

Internal local currency sales growth in our international dental consumable merchandise business increased by 1.4% during the quarter, reflecting a generally stable market environment.

While this growth was somewhat tepid, we believe the end markets we serve remain healthy, and we will continue to gain market share in the coming quarters.

Regarding international dental equipment, as expected, we saw a post-IDS sales increase in Germany during the quarter.

This was partially offset by some unique softness in Australia and Italy.

A highlight in our dental specialties business was in the sales of our global implants, which increased by approximately 7% in local currencies in the second quarter.

And really this is despite the fact that we have a significant market share in Germany, where the market is not growing as rapidly.

So generally, I would say we are very, very pleased with the performance of our specialties businesses and specifically on the implant side.

We are also -- we also marketed -- marked some important milestones in our Dental business in this second quarter.

This includes the fact that we celebrated the 20th anniversary of Henry Schein's merger with Sullivan Dental, which laid the foundation for Henry Schein to build the largest value-added dental distributor in North America.

At the time of the merger, our U.S. Dental sales were about $819 million.

Sullivan Dental, led by Bob, the late Bob Sullivan and his son, Tim, shared our commitment to focusing on practice care solutions.

The notion of helping practitioners operate a better practice so that they can provide better clinical care enabled us to continue to gain market share, to hire new Team Schein Members and increase shareholder value so that today, our U.S. Dental sales exceed, and this is in operatory area only, $3 billion.

This truly has been an excellent collaboration over the past 2 decades.

And we believe our U.S. Dental business and of course, our North American business is in excellent shape under the leadership of Tim Sullivan and of course, reporting up to our President and CEO of our Global Dental business, Jim Breslawski, who had the vision several decades ago to add field sales representatives to our successful catalog business at the time.

And that business, of course, has migrated to a digital e-commerce business today.

The past quarter also celebrated the 20th anniversary of the Dentrix merger.

Looking back to 1997, Dentrix had an installed base of some 3,500 dental practice management systems.

Since becoming a part of Henry Schein practice solutions, we have increased the number tenfold of just the Dentrix practice management system solutions and now have installed more than 35,000 -- have an installed base of more than 35,000 Dentrix systems in the U.S. and Canada.

That, of course, is in addition to our Easy Dental brand in the United States and the multiple brands we have around the world, including Exan, the leading brand in dental schools in North America, and I would say, in the world as well.

In doing so, we have helped more than 150,000 dentists in North America improve how they manage their practice and deliver patient care.

With our Dentrix, Easy Dental, Exan and other software solutions, we offer dentists and dental schools innovative practice management platforms for intuitive and efficient user workflows.

And again I'll stress, this is in addition to our terrific brands we have abroad in the U.K., Australia, New Zealand, France, Spain, et cetera, et cetera.

So let me just, on the Dental side, conclude that we are very pleased with our positioning in the Dental business in this country, in the United States, North America, abroad.

These strategies we believe are terrific.

We have an outstanding sales force providing terrific consulting services, bringing value to our dental customers.

We believe this strategy is right on.

And we're very, very excited about that business going forward.

And now let me touch on the Animal Health business.

Our Animal Health business continued to grow at a healthy rate both in North America and internationally during the second quarter.

Internal local currency sales increased by 5.9% in North America and 5.7% overseas.

The companion animal health market is among our fastest-growing segments and fits well with our strategy to deliver value-added solutions and support, particularly as the number of pet adoptions continues to grow.

And we believe our role in distribution in this end market continues to become more important during -- due to our access and strong relationship with veterinary practices across the globe.

To support our growth, midway through the second quarter, we celebrated the opening of the new Animal Health national distribution center in Columbus, Ohio.

We have a particular commitment to the Central Ohio area, where we employ almost 400 people across Henry Schein's businesses today.

As with our other businesses, through organic growth and strategic acquisitions, we continue to build on our success in partnering with our Animal Health customers to deliver high-quality solutions and support that help to promote longer and healthier lives for pets.

We're really excited again also by our Animal Health business, believe we're focused on the right areas, the companion animal part globally and in certain selected markets, also on the large animal part of the business but very selectively and of course, the equine business.

We believe our consumable strategy and merging that strategy with our own brand of products, the pharmaceutical relationships we have with the branded pharmaceutical companies, advancing generic drugs, the programs we have for software and, indeed, for diagnostic equipment and other forms of large equipment imaging, et cetera, is working well and for that business.

And we are very, very excited to continue to grow the Animal Health business in a growing market but in a market where we continue to gain market share in the United States and abroad.

Now let me talk a bit about our Medical business, which delivered solid internal growth in local currencies of 6.1%, which, of course, is excellent and much in excess of the market growth rate.

A slight decline in a relatively small international business affected our consolidated numbers.

But overall, our North American business posted internal growth in local currencies of 6.3%.

Of course, we believe continued market share gains in our North America Medical Group are the result of our ability to meet the needs of a dynamic, evolving health care market, particularly amongst large group practices, IDN health practices and in general, the multi-specialty group practices, where we see further consolidation taking place.

Now let me conclude with the Technology and Value-Added Services.

A highlight in the North American Technology and Value-Added Services area was double-digit growth in our financial services business, an excellent platform that has done well for us for many, many years.

Overall, revenue growth in this business in North America was impacted by a difficult comparison in the prior year and reduced sales related to discontinued lower-margin products as Steven mentioned.

We were pleased with the robust 12.4% internal growth in local currency as it relates to our international markets.

We are at the forefront of a movement to advance preventative care and wellness.

The fact remains that improvements in the quality of health care in greater proportion of healthy individuals will ultimately be driven by greater adoption of technology.

As such, we continue to invest in enhancing our technology solutions offering.

And I might add they are quite unique, which will help practices achieve these goals over time.

We partner with our customers at all levels within the company, from the consumable to the equipment to the pharmaceutical to the financial services to the software side of the business, from start to finish by gaining an understanding of our customers' practice needs and helping our customers envisage a technology vision all the way through recommending the best solutions, designing and installing the platform and ensuring the practice gets the full value from their investments.

All of this is designed to help drive the long-term success of the practice and in so doing, the health of the patients that our customers are serving.

Before we take your questions, I'd like to note that one more important accomplishment in the second quarter for Team Schein across the globe.

We are pleased to announce that we announced in June that the company moved to #243 on the Fortune 500 ranking, up from 268 and marking the 14th consecutive year as one of America's largest corporations based on sales.

And I might add that our markets are relatively small compared to most companies on the Fortune 500 list, which, of course, are serving much bigger markets.

We now are on the top half of the Fortune 500.

And our consistent climb up this list is a testament to our more than 21,000 Team Schein Members across the globe working out of 400-plus locations, who fulfill our mission every day to help health care professionals build better practices for the ultimate benefit of their patients while also serving the needs of the communities in which we work.

Thank you, Team Schein, for your steadfast commitment to Henry Schein and our mission to provide innovative, integrated health care products and services and to be a trusted adviser and consultant to our customers.

So we are most optimistic about the business right now.

We are completing our 2018, '19 and '20 strategic plan and are completing the execution of our '14 -- of our '15, '16 and '17 strategic plan with very good results.

So, excited about the future, pleased with the quarter and ready to answer any questions that our participants in this call may have.

Thank you.

(Operator Instructions) Your first question comes from the line of Robert Jones with Goldman Sachs.

This is Nathan Rich on for Bob this morning.

Maybe starting on the North American dental market, could you guys provide some more detail on what you believe drove the slower consumables growth in the quarter?

Especially given the comparison year-over-year, I think it was a little bit easier.

And I think the past several quarters, the company's view has been that the North American dental end markets are stable.

I'm just wondering if anything has changed with regards to that outlook.

Sure.

So let me start with the macro.

We believe that the North American, for that matter, the U.S. dental market is quite stable.

We believe that from a consumable point of view, the market is growing at the lower end of single digits.

But it's, nevertheless, growing at approximately the inflation rate.

There's not an increase really in units.

There are parts of the market that are growing perhaps better, including implants.

And so I would not read anything into that.

Actually, there has been a lot of comments into our consumer growth in the U.S. market, North American market this quarter.

There's timing issues.

And again, we're talking about basis points here moving one way or the other.

Timing, we did lose one of our larger customers, by no means our largest customer.

There is some movement towards lower-priced products.

I think we see this in the economy in general, some private brand, control brands, not really impacting in a huge way, that movement not really impacting in a huge way our profit per unit of products sold.

But overall, we believe that the market is quite stable from a consumable point of view in the United States.

Let me -- and North America for that matter, including Canada.

Let me just hasten to add that we believe the equipment market is more robust.

And this relates primarily to practitioners investing in technology, whether that's digital imaging, digital CAD/CAM, and our sales organizations being well positioned to help our customers adapt their practices to the digitalization of dentistry.

So we are quite optimistic about our North American business from a sales point of view and also from a profitability point of view.

Yes, I'd just like to add a couple of specifics to what Stanley's comments were.

Stanley talked about the loss of one of our special market customers as well as timing issues, including 1 less selling day this quarter in Canada because of the Easter holidays.

We talked about that last quarter, where we had 1 more selling day.

Those 2 items in total negatively impacted our North American consumable sales growth by at least 1 percentage point.

I also think it's important to note that when we look at the progression during the quarter, sales growth strengthened during the quarter.

And without getting into specifics for July, July was a very solid consumable sales growth in North America.

So I don't think we're seeing -- I don't think we think there's any market changes that are important to note.

I think we believe that there's a little bit of ebbs and flows and calendar issues that are contributing to it.

But we still feel like the market is pretty consistent.

Okay, that makes a lot of sense.

And then Steve, just on your guidance for North American dental equipment, appreciate the guidance on 3Q.

Do you have any early expectations for growth in the fourth quarter as you guys ramp up the distribution of the SIRONA line?

And how should we think about any potential impact on the consumable side of the business as I believe the agreement allows you to sell certain bundles and CEREC blocks and that type of stuff as well?

Well, I think we're very optimistic with the addition of the full SIRONA equipment line.

But I think to be fair, it does take some time to build the pipeline.

So while we would expect it to have incremental sales in Q4, I think really you have to look to 2018 to really give us a little bit of time to ramp up.

We're not giving specific guidance on that.

But we would hope to have overall very good equipment quarter in Q4 in part because of that.

But also we think the equipment market, as Stanley just said, has a lot of life in it.

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

Stanley, congratulations on the CEO award, well deserved.

Maybe I could follow up with just one question here just on the consumable side.

Steve, you gave some good color on the DSO changes and the selling day issues.

Wondering how much maybe your specialty business versus your general consumables business, if you could give any color on that in North America this quarter.

And also obviously, some disruptions going on at one of your larger competitors, just wondering if that is helping at all or if we should think of that as an incremental tailwind in the quarter at all.

Thank you, Jeff.

So I believe that overall, the specialties are helping, of course, not only in the sale of the specialty products, whether it's the implants, the wires, the brackets, the endo files.

But generally, this is pulling along business in the consumable area and in particular, on the equipment side.

And on the equipment side, we are doing quite well in selling equipment to specialists, and in fact, GPs that may do specialty work.

I think this has been very, very helpful.

I don't think the specialty businesses are material enough yet to impact the overall consumable growth rate in the United States in a material way.

But over time, I think you can expect that, that will continue -- that they will -- the specialists will impact our business in a positive way because of our ability to serve all of the specialty needs, not only in the consumables pharmaceutical equipment, but I might add in the software area, too.

I think as it relates to what's happening in the marketplace, we have seen disruption in the marketplace over the years come and go.

This is a highly competitive market.

We fight for every dollar of sales.

I don't think that is going to change in any material way.

We have an outstanding sales force.

We add to that sales force every year.

We recruit both from our competition and also internal rookies we hire and we develop them over time.

This is not only true of the sales organization but for the sales management.

And I think our sales force will continue to do well using the tools we have, whether it's the practice solutions, the e-commerce, the various kinds of educational and analytical tools that we offer them.

So I don't think any particular disruption, contrary to what I think many are writing about, is impacting our business in a significant way.

There's no freezing of the markets.

There is no massive movements of salespeople from one distributor to Henry Schein.

We continue to be going in the same direction that we have over the years, and we continue to add incremental salespeople in a moderate way but specifically to fill vacancies in markets that we believe we're underpenetrated.

So I think we're heading in the direction we've always headed in, which is to gain more market share through ensuring that we offer the best solutions to our customers, train our salespeople and execute well through our infrastructure.

Yes, I would just add, because you're also asking about specialties, and the biggest component of specialties for us is dental implants.

And we had a really good quarter in dental implants.

On a global basis, our organic sales growth was about 7%.

And it was higher in North America.

So we feel like we're taking market share in the implant market as well as other specialties.

But again, it doesn't move the needle all that much on a global basis because it's still relatively small compared to the core Dental business.

All right, Steve, that's helpful.

And maybe just one follow-up on the balance sheet.

So inventory levels did come down.

I know turn stayed about the same, but inventory levels did come down $50 million or $60 million relative to the last couple quarters.

With the end markets maybe being a touch soft in maybe North America might be the way to phrase it, where are you at with inventory levels?

Do you feel like you're at kind of a sustainable level?

Are there more cuts that need to be done?

Do you need to expand inventory ahead of your changed relationship in September?

Just kind of help us out on the balance sheet side a little bit.

Sure.

Well, we will need to build inventory going into September 1 for SIRONA because you need to be able to do installs and quickly service your customers.

So of course, whenever you add a line, that's natural.

But I think as we look out, there is an internal goal to get more efficient with inventory turns.

We do believe there's still room for us to continue to improve inventory turns.

And so longer term, we would feel that there's opportunity to take some cash out of the inventory by improving those turns.

It's still a specific goal that we have internally.

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

Stanley, maybe just to push you on some of your earlier comments, just sort of looking long term in Dental.

I think you mentioned sort of the domestic consumable unit growth would improve over time.

And if you could just help us out with what changes incrementally from sort of a macro standpoint from the current landscape to drive that improvement.

And then the follow-up, Steve, just while I've got you, maybe if you can outline for us the FX EPS tailwind today relative to when you provided '17 guidance back in November.

Thanks, Jon.

From a macro point of view, there is more and more literature that is being published by very credible scientific institutions, major dental schools, medical showing a direct correlation between good oral care and good health care.

I think this is being understood more and more by insurance carriers, I think by IDNs.

I'm not sure yet by government officials across the board, but many in Congress are understanding this.

And so we are seeing more and more programs emerge where medical practices are adding a dental component, dental practices are connecting with medical providers so that pediatricians are understanding the importance of good oral care.

So we remain very optimistic.

We do know that where patients, where the public is exposed to good oral care, the general quality of life increases and the cost of health care goes down, whether it's in the obstetrics area, the pulmonary area, the diabetes area.

And these are all areas that are being pushed by health care policy people as a way to reduce health care costs.

Wellness and prevention above all, the driving of ways to impact NCDs, noncommunicable diseases, is the best way to control health care costs.

People understand this.

And dentistry is right in the middle of these NCDs.

And so we remain very, very optimistic about where dentistry is heading.

We think there's a bigger role for oral care.

Yes, the drilling and filling will be going down, but there are many, many other areas of opportunity in dentistry.

And we are very, very excited about the future of dentistry.

I think it is very hard and inappropriate, I think, to measure dental consumables on a quarterly basis based on small movements in basis points.

I think in the long run, we will do okay.

And I think for the time being, we will see the lower part of single-digit organic growth in dentistry.

But we are headed, I think, for better times.

And I think as health care policy people get their needs understood, it will be good for dentistry.

So on the second part of your question, Jon, so when we originally gave guidance before the year started, we did say that we were expecting foreign exchange to be consistent with levels at that point.

We've seen some headwinds.

In Q1, foreign exchange negatively impacted our EPS by $0.02.

This current quarter, it negatively impacted our EPS by $0.01.

So year-to-date, we have $0.03.

We probably have, if things stay where they are, $0.01 or $0.02 more that will negatively impact us for the second half of the year.

So it's a little bit of a headwind, but it's not that significant.

But we're still comfortable with our full year guidance despite that.

And again, it assumes no major changes from where we are at this point.

I think that there is -- personally, I think that the dollar could strengthen a little bit more.

But we'll see if that happens or not.

Your next question comes from the line of Sarah James with Piper Jaffray.

This is Austin on for Sarah.

Just start off with we have seen some slower volume growth within the hospitals this quarter, including in their outpatient centers, where Schein tends to focus.

But this doesn't seem to affect you guys this quarter, so it sounds like you picked up some market share.

So what have you been hearing from your Medical business customers?

And how do you see growth in the Medical business going forward?

So Austin, good question also.

On the Medical side, the vast majority of our growth, other than a little bit of inflation, and there isn't much because there is, I think, some deflation in the medical world as larger customers understand the quality of products being offered and are trading, in many instances, to private brand, control brand rather than more expensive brands.

So I would say in terms of inflation, it's probably slightly deflationary.

But that doesn't really impact our profit because per unit, we still make about the same, if not more, on some of the private brand-type products.

Now as for units, in general in this space, it's hard to tell.

But what is clearly happening is that the large group practices are growing, IDNs are buying practices.

Although I think for the last quarter or so, we've been told or our industry statistics show a slight slowing down of the number of practices being bought by our IDNs.

But in any event, whether the IDN business is growing significantly or just marginally in the alternate care space, our growth is coming primarily from market share growth in that we are landing some large customers.

It is a little bit lumpy as to when these customers come onboard because it may take as long as a year to bring a customer onboard.

Our pipeline of new customers is pretty good.

We are well-known now in this marketplace, in the IDN and large group practice marketplace, as a reliable provider providing very good data and value-added services.

So we remain quite optimistic about our Medical business.

But I think one cannot expect double-digit growth every quarter.

And I'd be surprised if it goes below the mid-single digits.

But we're in that 5% to plus double-digit growth era for Medical, I think, for a while, very optimistic about the business.

Just like in Dental, Animal Health, we have very good management on the Medical side.

They're doing a good job.

But I don't think our business is at all correlated to what happens in the hospital arena.

Let me hasten to add that the second quarter flu diagnostic -- the diagnostic products were probably much lower than the previous year.

So if those visits -- practitioners related to flu and flu-like symptoms had remained constant, our growth would have even been higher.

Great.

And then on the gross margin side, results were slightly below our expectations.

So could you provide more color on what caused gross margin pressure this quarter?

And did business mix play a factor?

Yes.

Business mix did play a factor.

It was a part of the factor.

But we also saw a little bit of gross margin contraction in our European dental markets as well as some of our Animal Health businesses in certain markets.

So it was a combination of those things.

But again, if you look at mix and those other things, I think we focus -- while we focus on gross margin, we focus also on the operating margin.

And when you back out all of those adjustments that I went through in the prepared remarks, we still got 12 basis points of operating margin expansion.

A little bit lower than what we would like, but we're working on trying to improve that also.

Your next question comes from the line of Michael Cherny from UBS.

I hate to keep going back to this.

But on the dental market, and I think it was around this time last year when you started to see some market-related weakness across the board, as you think about the experience from the last year relative to consumables and your expectations, what type of leading indicators do you think you can start to identify to better understand some of the moving pieces here?

Or are there really none and it's just a matter of the market essentially sorting itself out?

So Michael, appreciate all the questions in this area.

But we are talking about swings of basis points.

It's really, really hard to give you precise information.

Again, in the second quarter last year, we were taken by surprise because the beginning of the quarter was good, and then it tapered off.

I don't think we're experiencing any of that kind of volatility.

Although I think as Steven mentioned, parts of the second quarter were a little bit weaker than, say, July.

But we have to be very careful because we don't know what August and September will be looking like.

But we are talking about basis points here in swings.

Overall, the market, as we said, is approximately stable in units, then you have some inflation.

But as the large group practices grow and particularly the mid-market practices grow, and that's the fastest-growing part, there are also, I would say, a little bit more discreet buyers.

They will compare products, but they won't necessarily -- they will have people that will look at the products to ensure that they're getting the best deal for a specific kind of product.

Our salespeople today are far more knowledgeable on quality differences between one manufacturer, another private brand, control brand.

And I think you could have a little bit of shopping that could suppress the numbers a bit.

But overall, it doesn't impact our profits.

In fact, in some areas, it increases the profits.

So we are -- I don't think there's any conclusions you can draw from our performance this quarter compared to last year.

There are also some timing issues.

And Steven mentioned Canada and Easter.

If you talk to some of our Medical people, they will tell you the timing of the National Sales Meeting had an impact.

But we are talking about small amounts of movement between 1 quarter and another.

And I think at some point, it doesn't prove to be that valuable in pursuing this.

And there's a lot being written about it.

But the dental markets, in our view, are still quite solid in the United States, in North America, generally throughout the world.

We remain optimistic, and we're investing in this part of the business and see lots and lots of upside on the software side, on the equipment side and in particular in our business, gaining market share across the board in all of the areas that we service.

And then just one more really quick question, Henry Schein has been investing for years in an e-commerce platform.

Can you give us any sense of how much of the business, roughly if you can, goes through some level of e-commerce channel within Henry Schein?

Yes, Steven will give you the exact number.

But of course, it's growing and in particular, here, as we move from smaller practitioners to mid-sized practices, very large practices, there is a movement, a migration to e-commerce.

This is not only Dental, this is in Medical, it's in Animal Health.

We just launched a new website, a very exciting website.

It's been turned on for all of our business units now over the last 3 months.

It's a project that's been worked on for 2 or 3 years.

And I'd like to take this opportunity to congratulate the teams that worked on that, of course, software development team but also the users, the businesspeople because it went in flawlessly from a customer point of view.

There's so much going on in the e-commerce section, it's very, very exciting.

Interoperability is all over the place in our field.

The direct connection between our website, what our customers are doing, study clubs, the digital imaging, digital prosthetics, all connected, practice management activity, lots and lots of stuff going on.

And this was very, very exciting as we move the business towards a digital platform.

And we believe that our unique systems will stand us in good stead, whether it's from competition within the industry, where, of course, it is very fierce, to competition that may emerge from other industries coming to our area.

We've built a pretty good moat and are continuing to advance our business through digitalization and e-commerce.

But Steven, you may have specific information.

Sure, yes.

So let me give you a little bit of data on a global basis.

So electronic sales runs -- on a worldwide global basis, runs at just under 50% of our sales.

However, it's important to note that on the equipment side, very little equipment sales are bought through the Internet.

There normally is demonstrations.

There's normally in-person meetings and things like that.

So for the consumables side, it's significantly higher than that just under 50%.

And it varies by market and varies by business unit.

But it is a very high percentage of our consumable sales that are being received over the Internet or in some form of electronic means.

Let me hasten to add as well that Henry Schein's leading telesales operations is very, very effective.

And I believe there's nothing in our market of a scale, of the capabilities as we have, not only in Dental but across the board.

And your final question comes from the line of Erin Wright of Crédit Suisse.

How has access to new products this year in Animal Health, like Zoetis' products, new generic products and others, contributed to top line growth?

And how much of the growth was attributable to sort of in-market demand versus the new products?

And as you sort of head into the second half of the year, how do you anticipate or do you anticipate any sort of meaningful changes to your vendor contracts with a more consolidated vendor base?

Yes.

So that's a good question also on the Animal Health pharma side.

I can't answer specifically on Zoetis.

If you'd call Carolynne or Steven, they can talk to you about specific products because Zoetis puts a large part of their business through us, but they keep a few products that they sell direct.

In fact, our relationship with Zoetis is very good.

They have advanced the amount of businesses they're putting through us in a very nice way.

I would say our relationships with our large pharma suppliers in general is very good on the Animal Health side.

I, myself, have met recently with CEOs of a number of these companies.

There's one underlying shift that occurred with one supplier that had really only 2 major distributors last year and added (inaudible).

The previous year had 3, went to 2 and now is back to 3. So that's moving some odd sales between the different distributors.

You take that out and overall, we have a healthy market and we continue to gain market share.

There's been a lot that's been written about pressure on margins.

And there's always been pressure on margins, I've been in this business for over 30 years, can't remember a year when there wasn't pressure on margins.

Our job is to ensure that we provide value to our suppliers.

A couple of them have gone through significant transitions as they have merged.

They've been very intimately focused.

I believe that they understand what needs to be done in order to motivate our sales force.

And I expect that we will continue to do well with all the major pharmaceutical players in the animal health space as they understand what they need to do to grow their market share with us.

And generally, very happy with our Animal Health business in the United States.

And then quickly say in Australia and New Zealand and in Europe, as we move towards a Global Animal Health distribution business, I believe the only distributor that's really global.

And we're focused on adding new markets.

We entered the Brazilian market and been well received, granted only in one particular region, 2 regions actually.

And we'll expand in Brazil and hopefully in Asia as well in the not-too-distant future.

So I think our relations with our major suppliers are good.

Some were a little bit inwardly focused.

And I believe that they understand what needs to be done in order to motivate our sales force.

So I'm generally very optimistic on our Animal Health business.

So I think, Carolynne, that's it, very excited about our future.

We're sunsetting our 2015, '16 and '17 strategic plan, I think, largely having met our major goals.

Of course, wish we had done better in some areas and surprised how well we did in others.

The 2018, '19 and '20 strategic plan is coming together nicely.

Of course, no one can predict the future 100%.

But I think we are putting good plans together to continue to expand our business globally through organic growth, focusing on inorganic growth.

There's lots and lots of opportunities.

But we can't avail ourselves of all opportunities because we simply don't have the human capital to integrate everything that looks logical.

So we are focused on capital deployment.

I think Steven indicated to me this morning again that he remains optimistic about buying stock back.

The pipeline of acquisitions is full.

We will manage our working capital quite well, so we will not have to add too much to that, even as business increases.

But you can't manage that every day.

You can manage it every day, but you can't get to progress every day.

But overall, I would say we're happy with the organization and with the progress we are making.

And so I look forward to providing increased shareholder value over the years to come.

Thank you for your interest.

Of course, Carolynne Borders is ready to take calls at...

(631) 390-8105.

And Steven at the same numbers, except 5915.

I've called that number before, although now I send you more e-mail.

So thank you all, and appreciate your interest.

Thank you for your participation.

This concludes today's call.

You may now disconnect.