漢瑞祥 (HSIC) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein Fourth Quarter and Full Year 2017 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, Summer.

And thanks to each of you for joining us to discuss Henry Schein's results for the 2017 fourth quarter and full year.

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 the 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 end-market growth rates and market share, are based upon the company's internal analysis and estimates.

The contents of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 20, 2018.

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.

Good morning, and thank you, Carolynne.

Thank you, everyone, for joining us.

Now let me start with a review of our financial results at a high level.

We closed out 2017 with a strong fourth quarter that demonstrates the advantage of our Henry Schein high-touch value-added solutions business model.

Our customers rely on our team of trusted advisors for the clinical, supply chain, technology and business solutions that practitioners and their office personnel need to operate the efficient -- to operate their practices efficiently day in and day out.

We satisfy practice needs through technology as well as our consultative high-touch selling approach, so our customers can focus on patient care.

It is really important to understand that we are, in fact, providing a high-touch relationship with our customers that has sustained our growth for well over a quarter century since we added the field components to our sales and marketing programs.

Before I begin to go into further information on the quarter and on the company, I would like to note that in recognition of our team members following the recent U.S. Tax Cuts and Jobs Act, Henry Schein plans to distribute up to $1,000 onetime cash bonus to certain designated staff members in the U.S. with 1 full year of service as of January 1, 2018.

We are pleased to be able to give back to certain Team Schein Members in the U.S. with a special bonus in recognition of the hard work and commitment to excellence.

This incremental investment in our team is a reflection of the motivation spirit and values that our broader team across the globe delivers to our customers every single day.

Steven, of course, will provide more details on the financial impact of this bonus.

So our competitive position in the marketplace is built upon 4 key elements, namely education, service and support, software and innovation and strong long-term customer relations.

Just to highlight, we field 4,200 highly trained field sales consultants and 2,200 telesales representatives across the globe.

These Team Schein Members are helping our customers operate a more efficient practice so that customers can focus on clinical outcomes.

In the field today, we have 200 equipment sales and service centers around the world, with more than 2,000 dedicated field technicians to service and maintain equipment.

They are supported by 1,000 customer service representatives.

It's an enormous amount of high touch that goes on each day between us and our million practices that we service, 1.5 million practitioners in those practices.

And of course, software and innovation is critical in advancing the practice goals of efficiency and clinical outcomes.

We service them day in and day out through our 350 software developers and 800 technicians on the telephones and in the field that support our customers.

As a company, Henry Schein is a healthcare solutions network powered by our people and technology.

That network is comprised of more than 3,000 suppliers, some 22,000 Team Schein Members and more than 40 -- 400 key opinion leaders and 85 years of knowledge and expertise in solutions.

This can provide the connectivity to our customers.

We are armed with strong value proposition.

We are optimistic about long-term growth opportunities and believe we are well positioned in attractive growth markets.

And we believe in our high-touch value-added business model, which we believe will withstand the test of time.

It will be in the results, we're quite sure of that.

We have successfully executed on our strategic plan for 2015 to 2017.

And now are embarking on our 2018 to 2020 strategic plan, which we'll discuss in greater detail later.

This team is committed to determining our thinking, our strategy in advance and have a phenomenal track record on execution.

But first, I'll provide some additional commentary on our recent performance and accomplishments, and Steven will review our financial results a little bit -- now actually.

And I will provide comments later.

Okay.

Thank you, Stanley, and good morning to all.

As we begin, I'd like to point out that I will be reviewing our results on both a GAAP basis -- reported GAAP basis and also a non-GAAP basis.

Each reporting period has items that affect non-GAAP results, and they are as follows.

For Q4 2017, our non-GAAP results exclude a onetime tax charge of $143 million or $0.92 per diluted share.

And this is related to an estimate of the transitional tax on deemed repatriated foreign earnings as well as the revaluation of deferred income taxes both that are associated with U.S. tax reform legislation.

In addition, we have a loss of $17.6 million pretax or $0.11 per diluted share.

And that loss is associated with the previously announced divestiture of our equity ownership in E4D Technologies.

On a full year 2017 non-GAAP basis, results exclude those same items as well as the litigation settlement expense of $5.3 million pretax or $0.02 per diluted share in the second quarter.

For last year, our Q4 2016 non-GAAP results exclude restructuring costs of $16.1 million pretax or $0.08 per diluted share.

And on full year basis, our non-GAAP results exclude restructuring cost of $45.9 million pretax or $0.21 per diluted share.

We believe that these non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business.

They enable the 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 out the business.

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

And you could see a detailed reconciliation of these items in Exhibit B in this morning's earnings release as well as on the Investor Relations section of our website.

Let me also point out that the fourth quarter of 2016 includes one additional selling week when compared to the fourth quarter of 2017.

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

We report on the 52,53-week basis with the fiscal year ending on the last Saturday of December each year.

Last year, we previously discussed this impact as it related to our 2016 versus 2015 results on the Q4 call.

And the next time that the extra week occurs for us will be in 2022.

So because of that, we have estimated the impact of the extra week on sales.

And in order to provide more meaningful analysis, I will be reviewing internal sales growth in local currencies adjusting for the extra week in the fourth quarter of last year.

So turning to our results.

Net sales for the quarter ended December 30, 2017, were $3.3 billion, reflecting a 6.3% increase compared with the fourth quarter of 2016.

The components are internal sales growth in local currencies of 5.1%, acquisition growth of 4.0%, an increase related to foreign currency exchange of 2.4% and the extra week negatively impacted our sales growth by 5.2%.

Again, you can see the details of our sales growth in Exhibit A of the earnings news release.

Operating margin for the fourth quarter of 2017 was 7.27% and expanded by 41 basis points compared with the fourth quarter.

But it's important to look at some additional details in our operating margin related to the Q4.

The first relates to restructuring cost in the fourth quarter of last year.

These restructuring costs in the prior year favorably impacted our operating margin comparison by 51 basis points.

Second, acquisitions completed during the past 12 month -- 12 months and the related expenses for those acquisitions as well as the impact of certain sales switching between agency sales and direct sales combined to negatively impact operating margin comparisons by 30 basis points.

Excluding the net impact of these items, our operating margin expanded by approximately 20 basis points in the fourth quarter on a year-over-year basis.

For the full year 2017, excluding the impact of the same factors as well as the litigation settlement expense in Q2 that favorably impacted our operating margin by 23 basis points, our full year operating margin was approximately flat compared to 2016.

I'd also like to note that we reported lower year-over-year expenses as the percentage of sales as we continue to realize operating efficiencies from previous restructuring efforts and remained focused on leveraging our infrastructure and tightly controlling expenses.

As we look forward to new opportunities to streamline our business and reduce costs, we are currently assessing additional restructuring possibilities in 2018.

If you look at our reported GAAP effective tax rate for the fourth quarter, it was 19% and that includes the onetime tax charge of $143 million as I just mentioned.

But on a non-GAAP basis, excluding this onetime item as well as the loss associated with the divestiture of E4D Technologies, our effective tax rate was 27.7%.

And this compares to 28.2% in the fourth quarter of 2016, which is also on a non-GAAP basis.

Full-year GAAP effective tax rate was 44% that compares to 28.8% last year.

But again on a non-GAAP basis, the full year 2017 effective tax rate was 26.8% versus 28.6% in 2016.

So we believe our tax rate will decline by somewhere between 300 and 400 basis points in 2018 and will be somewhere in the 24% range for 2018.

This reduction in the effective tax rate is reflected in the updated guidance that we have provided today.

Moving on.

The net loss attributable to Henry Schein for the fourth quarter of 2017 was $8.5 million or $0.06 per diluted share on a GAAP basis.

But if you look at the fourth quarter on a non-GAAP basis, excluding those onetime items and the restructuring costs, net income attributable to Henry Schein was $152.1 million or $0.97 per diluted share.

This represents growth of 0.5% and 3.2%, respectively, compared with the non-GAAP results for the fourth quarter of last year.

I'd like to provide a little bit of additional color on our results.

Amortization expense from acquired intangible assets related to M&A activity was $28.3 million pretax or $0.13 per diluted share for Q4 2017.

And for the full year, the amortization from intangible -- acquired intangible assets was $112.4 million pretax or $0.52 per diluted share.

Also would note that foreign currency exchange had a positive impact on EPS for the quarter, of approximately $0.02.

So I'd like to provide some detail on our sales results for the fourth quarter.

As a reminder, the sales growth figures will exclude the impact of the extra week in prior year, and I'll quantify this impact, as we go, as applicable.

So starting with dental sales for the fourth quarter of 2017, they increased by 8.2% to $1.7 billion.

This consisted of internal growth in local currencies of 4.3%, acquisition growth of 6%, an increase related to foreign exchange of 3%, and then the extra week in the prior year negatively impacted sales growth by approximately 5.1%.

North American internal sales growth in local currencies was 6.7%, which included 1.9% growth in sales of dental consumable merchandise.

Remember that growth in consumable products was negatively impacted by approximately 130 basis points due to the loss of a previously disclosed DSO contract.

And I think it's also important to note that this contract has now anniversaried, so this is the last quarter it will have an impact on our growth rate.

Our North American dental equipment sales and services was very strong at 18.1% growth in local currencies.

And our fourth quarter equipment backlog continued to remain very healthy.

International dental internal growth in local currencies was 0.1%, which included a 2.6% decrease in sales of dental consumable merchandise due primarily to lower sales in certain European countries, but strong growth in dental equipment sales and service revenues at 7.7%.

Our Animal Health sales were $889.8 million for the fourth quarter, which was an increase of 6.2%.

This consisted of internal growth in local currencies of 4.5%, acquisition growth of 3.7%, an increase related to foreign exchange of 3.2%.

And again, the extra week negatively impacted sales growth by 5.2%.

The 4.5% internal growth in local currencies included 6.0% growth in North America and 2.9% growth internationally.

Approximately 70 basis points of the sales growth in North America was from certain product switching between agency and direct sales.

Excluding this impact, the normalized sales growth for North America was approximately 5.3%.

We believe the solid sales growth for the quarter reflects both the healthy end markets as well as our commitment to offering a wide range of products and value-added services.

Our Medical sales were $636.9 million for the quarter, an increase of 2.6%.

Internally generated sales in local currencies was up 8.3%.

Acquisitions contributed 0.1%.

There was a 0.3% increase due to foreign exchange, and the extra week negatively impacted sales growth by 6.1%.

That 8.3% internal growth in local currencies included 8.7% growth in North America and a decline of 2.9% internationally.

We are pleased with our Medical growth, which has been primarily driven by strong organic growth from existing large customers.

Technology and Value-Added Services sales were $114.6 million in the quarter, an increase of 2.1%.

Internally generated sales in local currencies was up 3.2%.

Acquisitions contributed 0.6%.

There was a 1.1% increase due to foreign exchange.

And again, the extra week negatively impacted our sales growth by about 2.8%.

The 3.2% internal growth in local currencies included 1.8% growth in North America and 11.4% growth internationally.

The North American growth of 1.8% reflects the lower dental software sales in electronic services revenue versus the prior quarter but was partially mitigated by strong 12% growth in our financial services revenue segment.

The international market sales growth of 11.4% was highlighted by strong dental and veterinary software revenue.

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

More specifically during Q4, we spent approximately $225 million to repurchase approximately 3.2 million shares.

We elected to accelerate our share repurchases during the fourth quarter to take advantage of what we consider to be an attractive buying opportunity.

The impact of this repurchase on our fourth quarter diluted EPS was about $0.005 per share.

For the full year, we spent approximately $450 million to repurchase approximately 5.9 million shares.

And at the close of the fourth quarter, we had approximately $200 million authorized for future repurchases of our common stock.

If we look at some of the highlights of our balance sheet and cash flow, operating cash flow for the quarter was $238 million compared to $264.5 million last year.

For the quarter, operating cash -- sorry, for the year now, operating cash flow was $545.5 million versus $642.6 million in 2016, and the lower operating cash flow is primarily due to higher working capital.

Our capital expenditures for the year were $81.5 million, resulting in free cash flow of $464 million.

If we look at accounts receivable days sales outstanding, they were 41.5 days for the fourth quarter, which is virtually unchanged from the 41.3 days last year.

On a full year basis, they were also consistent at 41.2 days versus 41.3 days last year.

Inventory turns for the fourth quarter of 2017 were 5.3 turns and that compares to 5.5 turns last year.

On a full year basis, also similar, 5.3 turns in the current year compared to 5.5 turns last year.

So I'd like to conclude my remarks by noting that we are raising our 2018 financial guidance to reflect the impact of U.S. tax reform legislation.

For 2018, we now expect the diluted EPS attributable to Henry Schein to be $4.03 to $4.14 per share.

This is up from the previous guidance of $3.85 to $3.96 and reflects growth of 57% to 61% compared with our 2017 GAAP diluted EPS of $2.57.

This includes the impact of a onetime cash bonus that Stan mentioned earlier.

These distributions will total approximately $4 million and will be made in the first quarter of 2018.

The anticipated impact to our EPS is approximately $0.02 per share.

When compared to 2017 non-GAAP diluted EPS of $3.60, for 2018, EPS growth is expected to be in the range of 12% to 15% growth.

So since the tax benefit from stock-based compensation or ASU 2016-09 is expected to be less for us in Q1 2018 as compared to the prior year, we anticipate Q1 2000 (sic) [2018] EPS growth to be in the mid-single-digit range on both a GAAP and non-GAAP basis.

It's important to note that this is before the $0.02 impact of the onetime cash bonus that was just discussed.

This guidance assumes end markets remain stable and are consistent with current market conditions.

It's also guidance for continuing operations as well as any completed or previously announced acquisitions, but does not include any impact for potential future acquisitions, should they occur.

And this guidance also assumes foreign exchange rates are consistent with current levels.

Last comment I'll make is that we believe there will be no material impact to our 2018 financial results due to the adoption of the new revenue standard, ASU 2014-09, which is revenue from contract with customers.

So with that, I'll now turn the call back over to Stan.

Thank you, Steven.

Before we move on, allow me to comment in more detail on the February 12 press release from the U.S. Federal Trade Commission, alleging that Henry Schein and other distributors violated U.S. antitrust law by conspiring to refuse to provide discounts to an otherwise served buying groups representing dental practitioners.

We believe these allegations are totally meritless, and we intend to defend ourselves vigorously.

I'd also note that the complaint seeks injunctive relief and does not seek monetary damages.

We do not anticipate this matter will have a material adverse effect on our financial conditions or results of operations.

I want to reemphasize that despite whatever provocative allegations are contained in the complaint, the case is about whether we conspired with other parties not to sell to dental buying groups.

Based on the FTC's original definition of these buying groups, let me point out that we do business with more than 100 of these organizations even under a narrower definition recently advanced by the FTC.

We have done business and continue to do business with very -- with a very varied groups that we are now accused of refusing to do business with.

This is not logical.

Henry Schein has a long history of serving customers with integrity and honesty.

We have earned our reputation for doing business the right way.

This is exactly why we have been named in the Fortune's list of the world's most admired companies for 17 consecutive years from the first time we appeared on the Fortune 500 list.

And while we have been named at -- on Ethisphere's list of the World's Most Ethical Companies annually now, since 2012.

So we are really quite upset about this and really believe that this whole complaint is meritless.

Now I'll share a few financial highlights from 2017, as I noted I would earlier on in my remarks.

We achieved net sales of $12.5 billion in 2017.

That's up 7.7% from the prior year.

Internal sales in local currency in 2017 increased by 5.1% when excluding the impact of the extra week in 2016, which is in line with our goal of growing 1% to 2% faster than the end markets.

GAAP diluted EPS declined, of course, 17.1% versus 2016 GAAP results, mainly due to the charges association -- associated with the repatriation of foreign earnings and a revaluation of deferred taxes.

Non-GAAP diluted EPS growth was 8.8% versus 2016 non-GAAP results.

And for the full year 2017, we spent approximately $450 million to repurchase 5.9 million shares of our common stock, reflecting our continued confidence in the strength of our business and commitment to delivering shareholder value.

In addition, we completed 14 strategic acquisitions in 2017 as we continue to expand our geographic presence and enhance our product offering.

Together with these acquisitions -- together, these acquisitions have trailing 12-months revenue at the time of purchase of approximately $0.25 billion.

Specifically, these acquisitions expanded our digital dentistry solutions and broadened our portfolio of endodontic and surgical products.

In Animal Health, we acquired a cloud-based practice management solution and announced a new presence in Brazil among the other strategic initiatives to bolster our expertise and market access.

We also helped customers who were affected by the hurricanes, tornadoes and wildfires while supporting efforts to provide dental and medical services to underserved populations in the developing world.

To sum it up, we believe 2017 was a terrific year, a really solid year for Henry Schein.

So on the dental side, let me review the quarterly performance at each of our 4 business groups again, starting with dental.

In North America, dental consumable merchandise internal sales growth in local currencies was 1.9% in the fourth quarter, or 3.2% growth when excluding the impact of the loss of the previously disclosed DSO contract.

Excluding this contract, the growth rate has now accelerated for the past 3 quarters.

Looking further out, we are optimistic that the health of the macro environment ultimately will drive improved end market unit growth in the dental market in North America.

North American dental equipment internal sales growth in local currencies was 18.1%, which is really a multiyear high.

We are pleased with the strong equipment sales growth, which benefited to some extent from a solid contribution from the sales of the full line of Dentsply Sirona dental equipment.

But I really want to stress, we are, of course, delighted to be carrying the full range of the Dentsply Sirona equipment line, but we also did well across the board with our key dental equipment manufacturers, including A-dec, Midmark and 3Shape.

So our dental equipment business is really doing well, which is indicative of a strong market that dentists are committed to investing in.

And this is an across-the-board growth in all of the manufacturers that we represent.

Of course, as noted, the relationship with Dentsply Sirona in North America is off to a solid start.

We are optimistic that we continue to make progress on behalf of all our dental equipment manufacturing partners in educating practices on the benefits of digital dental technologies that will improve the effectiveness of patient diagnostics and treatment as well as the productivity in the dental office.

The digitization of dentistry is so exciting and we are very well positioned to advance digitization in dental offices throughout North America and indeed the world.

As Steven noted, international dental consumable merchandise internal sales in local currency declined 2.6% due to lower sales in certain European countries.

On the other hand, international dental equipment internal sales increased by 7.7% in local currency, the highest quarterly growth in more than 2 years.

You may recall that in -- and this by the way, is off a very good IDS quarter, second and the third, and so we have sustained growth in our international equipment business in Europe and abroad in general.

You may recall that in 2013, we announced the expansion of our position in the dental specialty markets with a 60% ownership interest in BioHorizons, a manufacturer of advanced dental implants that is sold globally.

In 2013, the sales were $115 million.

In 2017, the BioHorizons sales reached approximately $176 million.

Recently, we purchased the remaining interest in BioHorizons and now have a 100% equity ownership together with our investment in CAMLOG biotechnology, a leading manufacturer of implants in Europe.

Henry Schein has built an important position in the 2 largest implant markets, the U.S. and Germany.

We are also growing our presence in the rest of the world as dental professionals transition to digital dentistry is a critical element in implant dentistry.

So we're very pleased with our investment in the implant area and expanded our investment in the oral surgery section with our dental specialty solutions acquisition of Southern Anesthesia, which was added to the ACE portfolio.

We have greatly enhanced our ability to serve the needs of the oral surgery practitioners providing our customers with a wide range of products and value-added services including bone regeneration material that help our customers provide high-quality care to their patients.

Customer demand for implants and associated materials are expected to increase as digital processes adopted in the dental and the dental experience of patients is enhanced.

We are well positioned to benefit from the continued adoption with our broad dental specialties offering.

More to follow if people have questions.

Animal Health.

So the global Animal Health internal sales growth in local currencies was 4.5% in the quarter, which reflects our continued very good execution, both domestically and abroad.

We believe that the global end market is healthy, and we are benefiting from consistent delivery of innovative products, and let me stress, solutions and strong customer relations in this market.

In line with the increasing -- this increase in the value we provide to veterinarians, at the recent VMX conference in Orlando, we announced an important enhancement to our Axis-Q software known as Axis-Q LENS, L-E-N-S in caps.

This software enhanced -- better positions us -- enhancement better position us to offer veterinary practices, historical trending analysis to both reference labs and point-of-care testing.

This presentation of the fix diagnostic results makes it easy to identify variations in lab results in order to improve care.

Axis-Q LENS is the only product available today that can present trended results from multiple reference labs and multiple diagnostic instruments that are integrated with Henry Schein's vet solutions practice management software systems.

Keep in mind, we estimate that more than 55% of animal health practitioners in U.S. currently use Henry Schein's health -- animal health practice management technology.

Shortly after the end of the fourth quarter, we closed on a 60% ownership interest of ABASE, a distributor of veterinary healthcare products in the state of São Paulo in Brazil.

ABASE sells pharmaceuticals, pet food, diagnostic equipment and consumables, primarily to the companion animal, swine, poultry and bovine segments.

ABASE had 2017 revenues of approximately $27 million.

This investment strengthens our position in the Brazil's Animal Health market, which we established early in 2017 in the state of Rio de Janeiro with our investment in Tecnew.

It also diversifies our relationship with global suppliers and approximately doubles our volume in Brazil.

Now for the Medical group.

For the fourth quarter, internal growth in local currencies in the Medical group was a robust 8.3%.

We believe our Medical sales growth during the quarter continue to exceed the growth of the broader office-based practitioner market, reflecting our ability to penetrate large group practices, particularly through our strong supply chain management capabilities.

As we consider evolving health care landscape in the U.S., we believe the right solution is a system that seeks to expand access to care, stabilize insurance market and advance the movement towards wellness and prevention, as all of these are key to driving down healthcare costs.

We have a focus on continuing to offer solutions -- a solutions road map consulting with physicians to help them navigate this evolving landscape.

Also as provider consolidation continues with a rapid pace of healthcare systems expansion, Henry Schein's health care services infrastructure brings a great deal of expertise to the table to help integrate the delivery metrics, drive stabilization, improve quality and take transaction cost out of the nonacute supply chain area and believe that our team is doing an outstanding job in servicing this class of customers.

So now let me conclude with an overview of our Technology and Value-Added Services.

As Steven mentioned, Technology and Value-Added Services internal sales growth in North America was 1.8% in local currency.

This, let me stress, was impacted by lower dental software sales and electronic services revenue partially offset by strong financial services revenue, somewhat impacted by an allocation of our sales resources to bringing on the Dentsply Sirona business in the fourth quarter and not focusing as much on software sales in North America.

We do believe that this part of the business is very exciting and has huge potential as we continue to gain accounts, both small, medium and large, and expand our governing position in this software technology arena.

Note that we had a slight negative sales growth impact in the fourth quarter related to switches between agency and direct sales.

You may recall that in the third quarter of 2017, we had refocused a significant portion of our technology sales force, as I noted, we -- as we prepared to launch Dentsply Sirona equipment products this past September.

We saw that impact carry over into the fourth quarter of 2017 as we supported this launch.

We expect our software sales to begin to show improved year-over-year growth in 2018 as we transition to the initial launch of Dentsply Sirona product line in the U.S.

On the international markets, we delivered double-digit international sales growth in local currencies of 11.4%, highlighted by heightened strong dental and animal health software revenue.

Note that in December, we announced the acquisition of eVetPractice, a leading provider of cloud-based practice management solutions for health clinics.

As the veterinary practice management software market expands into the cloud-based solutions, with eVet, we are well positioned to provide customers with the latest in value-added services and technology solutions.

As part of our integrated portfolio technology platforms, which includes AVImark, ImproMed in North America as well as Vision, RxWorks and RoboVet internationally.

eVetPractice complements those offerings for customers who prefer to -- the benefits of a cloud solution.

We now have an excellent offering of cloud solutions in the dental and in the animal health space.

We remained, and still remain extremely optimistic about our practice solutions business and see great opportunity to add strategic capabilities to our platform during 2018 to 2020 strategic planning period.

This is a very exciting part of our business and we are really well positioned to help our customers operate more efficient practices plus provide better clinical care.

Before I open the call for questions, I'd like to make a few comments relative to our 2018 to 2020 strategic plan.

First, we're pleased to be recognized by the Ethisphere Institute as 2018 world's most ethical companies, marking the seventh 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 an honor to be recognized among some of the world's most respected businesses for our commitment to ethical business practices and corporate social responsibility.

Our corporate goal for the up -- for the coming 3 years is to further enhance our platform of value-added solutions that address customers' needs through a network of trusted advisers.

It is the core reason that our customers rely on us.

We help our customers operate more efficient and successful practices so our customers can focus on providing the best in clinical care.

The 3 business priorities we reinforced in the 2018 to 2020 plan includes the fundamentals of: one, protecting and expanding our core distribution business; two, creating an enhanced customer loyalty through our value-added solutions; and three, advancing our investment in exclusive proprietary products.

We will accomplish this through advancing our core distribution capabilities and value-added solutions, working closely with a set of manufacturers that are interested and focused on capitalizing on Henry Schein's brand equity with our exclusive proprietary brands -- branded partnership in specialty products.

Of course, focused on digital commerce, increasing high margin products, including specialty products and technology solutions, expanding our global footprint, and, yes, investing in Team Schein, our #1 asset.

So I realize that was a lot that we had to spoke about today, and we are open for questions.

Operator, if there are any questions from participants in the call.

(Operator Instructions) Your first question comes from Kevin Ellich of Craig-Hallum.

I guess, starting off with dental.

Stan, could you give us a little bit more color on the strong equipment growth you're seeing in the U.S.?

I mean, inventory on the balance sheet continues to build, and maybe if you can provide a little color there?

And then the follow-up is in animal health.

Just wondering how the Merritt Vet acquisition that you guys announced last year is coming along?

How the integration is going?

So let me start from the end.

The Merritt acquisition is totally integrated.

We delivered on our expectations, actually a little bit better.

On the equipment, we believe we are well positioned to help practitioners take advantage of the new technology that is available to them to increase the efficiency of their practice and position them to provide better clinical care.

This is not only in the U.S. but it's abroad.

Of course, we are delighted to have become a full-line distributor of the Dentsply Sirona product offering.

But our expansion in equipment sales and related services is related not only to Dentsply Sirona but to a number of other manufacturers that I mentioned in the call.

We are very well positioned to continue to grow well in this part of the dental market.

And dentists are investing in their practices, wanting to add the latest technology, which is also indicative of the optimism that dentists have in dentistry.

And again, let me emphasize this is in the U.S., but in Canada and abroad, likewise, dental laboratories are also investing in their practice -- in their labs and are heavily investing in digital technology.

Yes, on part of your question, let me just first add that 18% sales growth included both strong growth in traditional equipment.

Traditional equipment was double digits and high-tech equipment was also double digits, but a bit higher than the traditional.

So it's really across the board, strong sales growth in all the aspects of dental equipment in North America.

Related to inventory, yes, we did have to bring in inventory in order to meet demand and expect the demand for Dentsply Sirona products.

It's typical for us to have showroom inventory as well as being able to fill the orders as quickly as the customer needs or wants.

But I will say that both -- on working capital, we do have a goal of improving inventory turns.

I'd like to see somewhere close to a half a turn improvement over the next year and so.

So we do think that there is opportunity to become more efficient on inventory management going forward also.

Your next question comes from Jeff Johnson of Baird.

So Steve or Stanley, I guess, either one, just wondering.

The last couple of quarters, you've been trending towards -- at least towards that 3% number on the dental consumables North American basis if we exclude some of the noise.

Just wondering if you think that's a reasonable number to be thinking for 2018?

I know you don't guide by line item, but that's kind of where that number has been.

So any reason we shouldn't think that number can repeat again this year?

And then we've heard that flu may be having a little impact on cancellations early this year.

Just are you hearing any feedback from your customers about dental trends being impacted at all by the heavy flu season we've been seeing?

Jeff, on the market, the market is relatively stable.

Maybe it's growing percent, potentially little bit more than that.

There is a bit more optimism now than perhaps a year ago.

So it's definitely leading in a positive area and we continue to gain market share.

We hear this from our manufacturers, the data that's available showing us that we continue to gain market share.

Whether we grow 2% or 3% or 4%, it's sort of in that range.

Let me just emphasize that equipment is very strong.

We expect it to remain strong because dentists are investing in their practices.

As it relates to flu, yes, I think the statistics are out there that flu is having an impact on the population.

I think it's the highest percentage of the population to be infected by the flu virus in many years.

So I think it will impact the dentists in specific parts of the country.

But I don't think that will have a significant impact on Henry Schein's ability to deliver the results we are focused on and we anticipate.

All right.

Great, maybe as a follow-up, just on the FTC case.

I'm sure you can't say much or won't say much, but I think you had 14 days to respond to the complaints included in that filing.

And if you didn't, then they were deemed to be admitted to.

From your comments, Stanley, I'm assuming you're going to respond to each of those complaints.

But Steve, I guess, I'm wondering also if there's anything embedded in guidance from a cost standpoint, either from a compliance standpoint, an independent monitor standpoint or legal expense standpoint.

How should we be thinking about the expenses embedded in 2018 guidance from this issue?

So Jeff, Steven will respond to the financial aspects.

But Henry Schein, I think, it's the very first time we've ever commented on litigation.

But we feel this case is so outrageous and this is the one fundamental point.

We have done business with dental buying groups for many years.

Henry Schein, in fact, was the company that conceived the notion of dealing with special markets and groups of customers.

We continue to do business with very large buying groups, midsize buying groups.

And we're now accused of refusing to do business with these people we actually have been doing business with for 20-plus years.

So we absolutely deny these allegations.

We don't know what others have done or what potentially others have done, but we have not done anything wrong in our view, and this case is without merit from our point of view.

As you know, Henry Schein is a company where we have prided ourselves with ethical behavior, adherence to the laws, integrity, honesty.

And how can we do something that we -- how can we agree to do something that we're already doing?

It just doesn't make sense.

The FTC is accusing us of doing something that we're actually doing.

So it defies logic, this whole thing, and we vehemently, vehemently refute these allegations.

And this is the first time, I think, in the 22 years as a public company we've actually commented on litigation because this is so outrageous.

Yes, so the only thing I would add on that is that the complaint, if you take the time to read the complaint, has some, what I would call provocative comments.

But don't be swayed -- and I'm glad you asked the question, Jeff, for the benefit of everyone.

Don't be swayed by provocative statements.

Go back to the basics, which Stanley just mentioned, which is how could we be accused of conspiring not to sell to certain buying groups when we're selling and we have been selling and we've always sell to the same buying groups.

So again, be careful not to be swayed by, again, provocative statements in the complaint.

As far as financial impact, again, there is no monetary damages or fines that the complaint is seeking.

It's only injunctive relief.

We do have an estimate built into our guidance for some legal costs and other costs in order to deal with the matter.

Hopefully, we -- we've estimated that well.

Although as you could probably guess, it's hard to estimate that with perfection.

But we do believe that we have it adequately covered in our guidance.

Your next question comes from Glen Santangelo of Deutsche Bank.

Stan, I apologize in advance for hitting this FTC issue one more time, but I think it's such a big deal for investors.

You seem to make the case that you were selling to this certain class of customers all along, and, hence, the complaint is meritless.

But if you look at the complaint, they actually say that the companies were conspiring to, to refuse to provide discounts.

So it kind of sounds like in the complaint that the company may have been treating this one sort of customer class a little bit differently from a discounting perspective.

And I guess, what investors are nervous about, if that's true, will you have to adjust your business practices in a way that kind of makes you slightly less profitable on a go-forward basis?

So you may not be able to comment, but I figured I would throw it out there.

So we deny these allegations.

We have been a company that has worked with GPOs, whether it's in the dental space, the medical, animal health space for a long time.

I don't think -- I can't imagine any scenario where we have to now start adjusting our pricing policies because of the FTC complaint.

We have been servicing these customers.

We were the company that conceived the notion of special markets 22 years ago, where we went out to service large group practices.

We now have a midmarket group that is focused on midmarket practices and have supported small practices involved in buying groups for a long time.

So this whole thing doesn't make sense from a Henry Schein point of view.

And I don't believe this will impact our margins.

It is possible that other things -- other factors could impact our margins.

And as Steven has noted on many occasions, we are working to increase our efficiency to advance sales to higher-margin products, et cetera.

But I don't think this particular set of circumstances will impact our margins.

Okay, I appreciate that.

Maybe just one follow-up for Steve on the guidance.

Steve, if you look at the raise, it looks like you raised about $0.18 at the midpoint and you also absorbed the incremental $0.02 of cost in the employee comp expense.

And so if you think about that as an equivalent of a $0.20 raise, some are concerned that if you look at the tax differential, that, that would've been a little bit bigger than a 20 -- would have implied a little bit bigger than a $0.20 raise?

It's a little bit surprising, given how strong the organic sales trends seem to be and the momentum seems to be heading in the right direction.

So any sort of comments to sort of reconcile those 2 points so we know how to think about that?

Sure.

Well, first of all, our guidance increase was only related to the tax impact net of the $0.02 comp that we talked about.

We did not change guidance for any other aspects of the business.

And if you look at -- and you could do the math yourself, but if you look at an estimate of somewhere between 3% and 4% lower tax rate for the company, and if you use something, even the midpoint of that range, I think you'll quickly get to the guidance that we gave.

Remember, this is a very complex tax law.

We're still feeling our way around it, so the goal is to be a little bit conservative on our guidance on it because there are many moving parts, including what percentage of our income is within the U.S. versus in other tax jurisdictions.

And -- but again, the guidance was only changed because of that.

I will also remind you that if you remember in Q1 of this year, we had 2017, we had an outsized tax benefit for long-term compensation.

That was because the stock price is one of the variables that determines on vesting date, what the actual tax deduction will be, and because over the 3-year period that ended in Q1 of 2017, the stock price performance was very strong.

We're not expecting that same benefit in 2018, so that's what's built into our tax guidance also.

But again, if you just do the math as I outlined, I think you'll come very close to what we did in guidance.

Your next question comes from Robert Jones of Goldman Sachs.

I guess, just to go back to the U.S. dental equipment, the 18% internal growth, I know Stanley, you mentioned that it was a combination of legacy equipment that you had access to and then also obviously, the Sirona portfolio that's new.

Is there any more perspective you can share there for us?

I think it's important for investors to try to parse out just how much of that big ramp in growth was attributable to your access to the Sirona portfolio specifically.

Yes.

We are not giving guidance on the breakdown.

We never have between the manufacturers that we generate sales from.

So I think Steven has some clarifying points here.

We've never done that.

So I think it's best to ask the manufacturers directly.

Yes -- no, I don't want to give specific supplier guidance.

But we did say that traditional equipment was very strong also at double digits within that 18%.

And I'll just comment that the Dentsply Sirona was not a significant impact on traditional equipment.

It was more A-dec and other lines that we have and Dentsply Sirona really impacts more for us the high-tech equipment, at least in this most recent quarter.

So again, it was really broad-based, our equipment sales growth, so we're very pleased with that.

That's helpful.

And I guess, just to go back to the FTC complaint.

I know Stanley, clearly, we understand your view on the matter.

But I was more curious just, have you -- if you guys could talk through what the range of outcomes are possible from this?

Is there anything you can share with us as far as what types of resolutions on what time line we might expect?

I don't think there is another official trial date until October.

So just wondering what kind of guideposts or types of outcomes should we think about related to this.

Yes.

Bob, if you [pull] the complaint, because it is public information, you can see what the complaint is asking for in relief, so there's details in that.

And rather than me going by memory, I'll refer you to the complaint directly.

But again, it's all injunctive relief.

There are no financial damages.

But take a look at the detailed complaint because that's all we know at this point.

Summer, we'll move on to another question.

Your next question comes from Jon Block from Stifel.

Two questions.

Let me ask the first one, then hopefully, I have time for a follow-up.

So just to shift gears, international dental consumable results, I believe, down 2.6%.

That was the first negative quarter that I have since about 1Q '15.

You guys navigated internationally very well during some of the macro weakness.

But anything to call out there?

Or do you expect to bounce back in the coming quarters?

And then I just got a quick follow-up.

Well, the weakness internationally really was not a new event, although maybe it was more pronounced this quarter.

We did talk about in certain European countries specifically Germany with some weakness in that market last quarter.

That's continuing.

I think we do believe that the European market is still a very good market.

We are very focused on improving our value-add component.

We're very advanced in the U.S. and some other markets, and we're not just quite advanced at this time in Germany and a couple of other markets.

But there's a strong focus on that.

So I think -- I can't say the next quarter necessarily.

But if you think out medium term, I think that you'll see more improvement in our international dental revenues.

Just again, without putting a new metrics out there though, we have to track every quarter, just simply, this is too much to track for investors.

But in Germany, there were 5, I think, less business days this quarter because of the way the holidays fell.

And there is a challenge in the consumable market in Italy.

We don't think it's going to be a challenge for that long.

And there was some weakness in France on consumables, but we don't see any of these things as long-term trends.

Okay, great.

Thank you.

And a quick follow-up.

Steven, you called it a potential, I believe, restructuring that you alluded to later in 2018 and frequent restructuring certainly are not common for Henry Schein.

I think you last took one in 2016.

So at a high level, any details you can provide?

What division would this be specific to?

What are you guys tweaking?

Because, again, I think restructuring supplier work, maybe, every 4 or 5 years and now you again called out one possibly in '18 after one in '16.

Sure, John.

It's hard, we're just looking at what the opportunities are.

And the reason why I mentioned it is because we do think there's further opportunities to improve profitability, to take some cost out of the system.

But at this point, it's really part of the analysis.

We haven't completed the analysis so I don't have specifics.

I can't tell you exactly where it might be or what the potential benefit would be.

But I do raise this because I think that there is a reasonably good likelihood that when we finish the analysis, we'll have opportunities to improve profitability through restructuring activities.

You're right, it's not something that we do all the time, but we think there's opportunity here and why not take advantage of it at this time.

And also, just more color.

We don't expect this to have any material impact, certainly no material impact on the front-end of the house in terms of sales force reduction or anything like that.

But we've been investing in software and systems, and we think we can increase our efficiency in those areas and also integrate some of our acquisitions that we made in the past into our core systems.

So it's that kind of work.

And we're -- we've been working on this for a while for the past 6 months, and now we'll finally conclude it or working towards concluding on what specific plans to implement.

So I guess, also the short follow-up is we'll give a further update next quarter as we have those plans more fully developed.

Your final question comes from Brandon Couillard of Jefferies.

A couple of housekeeping.

Steven, was there any outsized flu impact to the medical revs in the fourth quarter?

And then could you just confirm in terms of the '18 guidance, what it embeds for currency tailwind on EPS as well as your margin expansion expectations for the year?

Sure.

Flu vaccine sales were a little bit stronger in Q4 versus Q3, but it wasn't a material impact on our overall sales growth.

We do expect to sell a similar number of doses somewhere in the 6 million, 7 million dose range in 2018 that's embedded into our guidance.

And foreign exchange, we're really not expecting any major movement in foreign exchange from current levels.

Obviously, our guidance can absorb if it's on the downside or we'll have upside, small movements because the range is wide enough to absorb that.

But if there was a material change in foreign exchange rates, we would call it out in 2018, should it happen.

Thank you.

Now Stan will conclude with his remarks.

Thank you, everyone, for calling in.

Thank you for the questions.

As I think you can tell from Steven and my tone, we remained most optimistic about the company, and we're very excited as we unfold our 2018 to 2020, strategic plan.

We feel very good with our high-touch value-added proposition of serving customers with a wide array of value-added services, delivered through our field consultants and supported by telesales, and what we believe to be world-class electronic ordering and other ways of doing business with Henry Schein, and are very, very enthusiastic about the future.

So thanks for your interest.

Again, if you have questions, you can call Steve at 5915 as it's the last 4 digits of the Henry Schein number.

And Carolynne at...

(631) 390-8105.

So thank you very much, and we'll be back in, I believe, 60 days.

Right?

Or 90 days.

Just under 90 days.

Just under 90 days.

Thank you.

This concludes today's conference call.

You may now disconnect.