漢瑞祥 (HSIC) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein 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, Rae, and thanks to each of you for joining us to discuss Henry Schein's results for the 2018 second quarter.

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 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, August 6, 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.

Thank you, Carolynne.

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

We are quite pleased with our results for the second quarter, which reflects solid revenue growth in general healthy end markets as well as our continued success in gaining market share in all of our business groups.

We are in the early stages of executing on our new strategic plan for 2018 through 2020, yet we are already making solid strides and expanding our offering of innovative solutions and extending our value proposition for our customers.

We are indeed excited about the potential for our new dental technology joint venture, Henry Schein One, which closed on July 1.

This joint venture was created to deliver integrated dental technology that combines leading practice management, marketing and patient engagement solutions into one connected management system.

Our Medical business remains highly relevant as, of course, reflected by our continuous and sustained growth in sales and market share.

We are on track with our efforts to prepare for the planned spin-off of our global Animal Health business with Vets First Choice, and a combination with Vets First Choice, which will create a new publicly traded company to be named Vets First Corp.

We believe this transaction will unlock shareholder value for Henry Schein shareholders as Vets First Corp.

will be well positioned to achieve a premium market valuation.

In addition, of course, we believe Henry Schein will continue to drive further growth in our leadership positions in our Dental and Medical businesses as a result of our sharp focus and, of course, increased investment of resources.

We are focused on the development of practice management and clinical solutions that are highly relevant to our customers, and we have been successful as a result of our commitment to a high touch value-added approach, which has advanced our brand equity.

We are committed to the strategy long-term, and we believe it will continue to advance our brand equity and accordingly, shareholder value.

Our strong relevance to our customers also means a continued focus on accelerating innovation with our -- within our Dental, Medical and Animal Health platforms, particularly with dental -- with digital dentistry.

And we remain agile, embracing an operating culture that is fast, yet stays true to our values and our collaborative and intrepreneurial spirit.

With exciting changes taking place at Henry Schein this year, we are at a pivotal moment as we drive forward with innovation that we believe distinguishes our go-to-market strategy and will help our customers operate a more efficient practice so that practitioners can deliver quality clinical care.

I would also note that we are providing more details today on our comprehensive restructuring plan designed to increase profitability by improving business efficiencies, reducing redundancies and optimizing Henry Schein's infrastructure.

Steven will walk you through those details.

But first, I would like to comment on why we are undertaking this initiative.

By continuing to streamline our operations, we expect a great and leaner organization that will allow us to better serve our customers' rapidly changing needs and our ability to continue to build shareholder value.

These changes are difficult to make.

However, we recognize they are necessary to enable Henry Schein to continue to build upon our success as well as to deliver solid long-term financial returns to our shareholders.

Now let me ask Steve to review our financial results, the restructuring and guidance, and then I'll provide some additional commentary on recent business performance and our accomplishments.

Steven?

Okay.

Thank you, Stanley, and good morning to all.

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

Our Q2 2018 non-GAAP results exclude restructuring costs of $14.9 million pretax or $0.07 per diluted share as well as transaction costs related to the planned Animal Health spin-off of $7.6 million pretax or $0.05 per diluted share.

Also, our Q2 2017 non-GAAP results exclude a litigation settlement expense of approximately $5.3 million pretax or $0.02 per diluted share.

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

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

For a reconciliation, see Exhibit B in this morning's earnings release as well as on the Investor Relations section of our website.

So now turning to our results.

Net sales for the quarter ended June 30, 2018, were $3.3 billion, reflecting an 8.7% increase compared with the second quarter of 2017 with internally generated sales growth in local currencies of 4.8%.

When also excluding the impact of certain products switching between agency sales and direct sales, which impacts both our Animal Health, and to a lesser extent, our Technology businesses in North America, our normalized internal sales growth in local currencies was 6.1%.

You can also see the details of our sales growth on Exhibit A of our earnings news release.

Operating margin for the second quarter of 2018 was 6.1% and contracted by 83 basis points compared with the second quarter of 2017 as a result of a few factors.

Our operating margin in the second quarter included restructuring costs as well as the transaction costs related to the planned Animal Health spin-off and the prior year -- and prior year included litigation cost.

These 3 items combined to negatively impact year-over-year operating margin comparison by 50 basis points.

Excluding the impact of these items, our operating margin contracted by about 33 basis points year-over-year.

The operating margin in the second quarter was negatively impacted, primarily by lower gross margins in North America.

We do have, as a priority, a plan to increase sales of higher-margin products to drive gross margin improvements across our businesses.

We believe we can enhance our offering with additional technology as well as other practice management solutions, while advancing our specialty products businesses, our Henry Schein brand and our other exclusive products and brands, just to name a few areas of focus.

These initiatives will take a little bit of time and the investment -- and investments, so the return will be not recognized immediately.

But we believe we can make good progress towards these goals this year as we execute on our 2018 to 2020 strategic plan.

Our reported GAAP effective tax rate for the second quarter of 2018 was 24.9%.

This compares to 28.7% of our GAAP effective tax rate for the second quarter of 2017.

On a non-GAAP basis, which excludes the income tax benefits of the restructuring and spin-off cost, our effective tax rate was 24.1%.

And this compares to 29.0% for the second quarter of last year, also on a non-GAAP basis.

We believe our full year 2018 effective tax rate will be in the 24% range.

Moving on.

Net income attributable to Henry Schein, Inc.

was $141.2 million or $0.92 per diluted share on a GAAP basis, representing growth of 3.8% and 7%, respectively, compared to the second quarter of 2017.

Non-GAAP net income attributable to Henry Schein, Inc.

for the second quarter of 2018 was $159.8 million or $1.04 per diluted share, and this represents growth of 14.7% and 18.2%, respectively, compared with the second quarter of 2017.

I'd also like to provide some additional color on our results, noting that amortization from acquired intangible assets was $30.2 million pretax or $0.15 per diluted share for Q2 2018.

And for the first half of the year, amortization from acquired intangible assets was $61.3 million pretax or $0.30 per diluted share.

Also note that foreign currency exchange had a positive impact on diluted EPS for the quarter of approximately $0.01 per share.

Let me now provide some detail on our sales results for the second quarter.

Recall that Good Friday fell in Q2 last year compared to Q1 this year, this resulted in 1 additional selling day in Q2 of the current year in several major countries internationally, and I'll discuss those details in a moment.

Dental sales for the second quarter of 2018 increased 8.4% to $1.6 billion with internal growth in local currencies of 4.4%.

Our North American internal growth in local currencies was 5.1% and included 4.7% growth in sales of dental consumable merchandise and growth of 6.2% in sales of dental equipment sales and service.

The impact on dental consumable merchandise sales growth related to Good Friday was relatively immaterial at approximately 15 basis points.

Our international dental internal growth in local currencies was 3.4%, which included 3% growth in sales of dental consumable merchandise, which was favorably impacted by approximately 1% due to the timing of Good Friday.

And our growth in dental equipment sales internationally was 4.7%.

Our Animal Health sales were $985.9 million in the second quarter, an increase of 10.6% with internally generated sales growth in local currencies of 4.4%.

The 4.4% internal growth in local currencies included 3.2% growth in North America.

However, when normalizing for the impact of a manufacturer switching from a direct to an agency agreement, sales growth was a robust 10.9%.

We believe this double-digit normalized sales growth for the quarter reflects a healthy end market.

International Animal Health sales growth in local currencies was 5.8% and was favorably impacted by approximately 1% due to the timing of Good Friday.

We have a commitment to gain market share through our offering of a wide range of products and providing relevant value-added solutions, which is reflected in the continued success of our global Animal Health group.

Turning to Medical.

Our Medical sales were $614 million in the second quarter, representing an increase of 7.5%, with internally generated sales growth in local currencies of 7%.

And that 7% included 7.1% growth in North America and 4.9% growth internationally.

We are very pleased with our overall Medical sales results, which is primarily driven from solid organic growth from existing large customers.

Technology and Value-Added Services sales were $113.8 million in the second quarter, an increase of 4.9% with internally generated sales growth in local currencies of 3.0%.

In North America, Technology and Value-Added Services had internal sales growth of 1.7% in local currencies or 2.2% growth when normalized for, again, certain product switching between agency sales and direct sales.

Our International sales -- local internal sales growth was 9.3% and was strong across the board, highlighted by double-digit growth in both financial services and dental software revenues.

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

Specifically, we repurchased approximately 744,000 shares during the quarter at an average price of $71.69 per share, representing approximately $53 million.

The impact of this repurchase on our second quarter results was immaterial.

Also, at the close of the second quarter, Henry Schein had approximately $147 million authorized for future repurchases of our common stock.

If we look at our operating cash flow for the quarter, the operating cash flow was $287.8 million compared to $228.7 million last year.

We continue to believe we will have strong operating cash flow for the year.

Now I'd like to walk you through some additional details on our planned restructuring.

We recently announced this initiative to rationalize our operations and provide significant expense efficiencies.

Periodically, we look to reduce costs particularly following a number of acquisitions as we have done in the past.

Accomplishing this through a coordinated effort is the most efficient means to reduce and realize cost optimization.

As we noted last quarter, we're looking at opportunities to augment our technology solutions to generate improved efficiencies across the business, particularly with redundant activities resulting from prior acquisitions.

In an effort to create a leaner organization, there will be some headcount reductions that may also include consolidation of certain warehouse and other activities in order to eliminate such redundancies, although we always consider whether the benefit is significant enough to warrant the amount of resource and attention and cost that is associated with these transactions.

These actions will allow us to execute on our plan to reduce our cost structure and form new initiatives that we believe will drive future growth under our 2018 to 2020 strategic plan.

We expect to record onetime restructuring charges in 2018 of between $45 million and $55 million on a pretax basis or $0.22 to $0.27 per diluted share.

These restructuring charges primarily include severance pay, facility closing costs and outside professional and consulting fees directly related to the restructuring plan.

We expect the savings from these restructuring initiatives to have an average payback in about 18 to 24 months after the completion of these efforts.

I'll conclude my remarks by noting we are raising the bottom end of our 2018 non-GAAP diluted EPS guidance range.

At this time, we are not able to provide estimates for the impact of total costs related to the planned Animal Health spin-off in our 2018 financial results, therefore, we are not providing the corresponding GAAP guidance.

Note that our 2018 guidance is based on current revenue recognition standards, and we do not believe that the impact of the new revenue recognition standard ASC 606 will be material to our results.

So 2018 non-GAAP diluted EPS attributable to Henry Schein is now expected to be $4.06 to $4.14, reflecting growth of 13% to 15% compared with the 2017 non-GAAP diluted EPS of $3.60.

And this is versus our prior guidance of $4.03 to $4.14 per share.

The guidance includes costs related to our previously announced onetime cash bonus to certain designated staff members and excludes costs related to the restructuring and planned spin-off of the Animal Health business in 2018.

2017 non-GAAP results exclude costs related to taxes associated with the U.S. tax reform legislation, a loss associated with Henry Schein's divestiture of the equity ownership in E4D Technologies and a litigation settlement expense in 2017.

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

Also, our guidance is for continuing operations as well as completed or previously announced acquisitions and does not include the impact of any potential future acquisitions.

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

Following the close of the Animal Health spin-off, Henry Schein expects to deliver EPS growth for the remaining consolidated Henry Schein business in the high single-digit to low double-digit percentage range.

We expect to update our full year guidance for the remaining business once the spin-off closes.

So with that, I'd like to turn the call back over to Stanley.

Thank you very much, Steven.

Let's review some business highlights from our second quarter 2018 results.

In our Dental business, we, of course, are pleased with our 4.7% internal sales growth in local currencies in our North American dental consumable merchandise business.

This was the highest quarterly growth rate since the fourth quarter of 2015.

This growth in part reflects a favorable comparison versus the same quarter 2017.

We continue to believe the end market is stable, and we have benefited from market share gains.

North America dental equipment internal sales in local currencies grew by 6.2%.

Dental equipment sales growth was solid with a number of our key manufacturing partners in the second quarter of 2018, including KaVo Kerr, Midmark and A-dec.

With respect to Dentsply Sirona equipment sales in North America, we continue to make good progress in the second quarter and have been pleased with the overall product line ramp in the U.S. as part of our strategy to offer our customers a wide selection of choices to meet each clinician's unique practice needs.

Looking at our equipment categories, local internal North American CAD/CAM sales were up 35%.

Overall, North American high-tech equipment sales were relatively flat since strong CAD/CAM sales growth was offset by soft digital X-ray sales or imaging sales.

We believe the soft digital imaging sales are primarily due to higher market penetration, although we expect this market to still be a very solid market in the years to come.

On a global basis, in local currencies, CAD/CAM sales grew by more than 28%.

That's on a global basis.

And our dental implants business grew at approximately 5% on an organic basis.

Looking at the International business, we believe the end markets in Europe, including Germany, our largest European dental market, are stable.

We are benefiting from our dual market approach in offering full service as well as telesales and e-commerce distribution capabilities in many European countries.

In understanding the specific needs of our customers, practice size and focus, whether general dentists or specialists, and delivering solutions for those needs, we create close relationships with our customers.

I think this is such a key component part of our success and really needs to be appreciated and understood by all of our constituents.

In May, we announced the launch of our SLX Clear Aligner System, and we have been very pleased with the progress to date.

We just started taking orders towards the end of the quarter, so we are still early in our launch process.

But feedback to date from customers and KOLs, the key opinion leaders, network has been quite positive.

The goal of our Clear Aligner Solution is to reduce overall treatment time, while improving practice efficiency.

We believe there is significant and growing global market potential for aligner products.

We see this market as still growing nicely.

And we look forward to building our Aligner business as we launch our system in the United States, to a great extent through the balance of 2018, and we expect to expand in new geographies in the earlier part of 2019.

Now let's talk about the Animal Health group.

We are pleased with the global Animal Health sales in the second quarter, particularly North America, with normalized internal local currency growth of approximately 11%.

Our team is working diligently to prepare for the spin-off of our global Animal Health business and the simultaneous merger with Vets First Choice to create, as noted earlier in the conversation, Vets First Corp.

While we are working towards a goal of closing by the end of calendar 2018, it is possible that the closing may slip into the first quarter of 2019.

We believe that Vets First Corp.

will provide veterinarians with a powerful new platform to grow their practices, of course, through improving client engagement and, of course, driving better health care outcomes for pets.

Following the close of the transaction, Henry Schein plans to continue to pursue our wide array of growth opportunities in a broad-based Dental and Medical business as we implement our 2018 to '20 strategic plan.

Our focus will remain on delivering innovative solutions that enable customers to deliver best quality care, while increasing the efficiency of our customers' practices, including driving greater patient traffic and enabling technology and equipment interoperability, it's very important.

Our Medical business also continued to perform well with high single-digit growth in local currencies.

Our customers rely on our consultative high-touch model, which helps them adapt to an evolving health care environment, while remaining nimble and efficient as the enterprises grow.

Our strong supplier relationship and supply chain expertise are essential to our strategy and have enabled us to grow our Medical business more rapidly than end market growth.

Our success is driven by a differentiated strategy, including customer segmentation, value-added solutions and our strong brand equity.

We have deployed customized account management models to effectively service health care systems, ambulatory surgical centers, emergency medical services, urgent care clinics and independent physicians, offices with products, services and, yes, solutions, that are highly relevant to their practice.

Moving on to our Technology and Value-Added Services businesses.

We announced in -- early in July that we've closed on our joint venture to form Henry Schein One, which is a new dental technology and service company offering one connected technology platform for innovative software, hardware and services.

Henry Schein One is integrating our solutions into one practice management system that connects office technologies, so office digital solutions are seamlessly integrated, share more data and more -- and automate more tasks.

Our plan is to offer bundled software packages to our customers starting with implementing demand for some office site products into our Dentrix and Easy Dental software packages.

In the coming months, we plan to continue to add additional bundles to our Practice Management solutions and, for example, bundling software solutions such as Sesame for the specialty dental practices.

So I would like to spend a few minutes discussing the cornerstone of our strategy and a key differentiator to our business, which is our portfolio of value-added solutions.

We have received feedback from investors that the investment community would like better -- would like to better understand what those solutions are comprised of and how these value-added solutions will have an impact on our business results.

While many competitors seeks to compete on low prices only and often with a limited selection of products, we offer competitive pricing, while also providing the broadest array of products and solutions and support that help customers operate in more efficient practice so commissions can deliver quality care.

Really, really important strategy that we've had in place for decades and it has worked so well for Henry Schein.

Our high-touch value-added model is focused on 4 key elements: education; service and support; software and innovation; and finally, strong customer relationships.

Our offering extends beyond supplies and equipment to business solutions, technical service, digital technology and Practice Management at clinical solutions.

Our Practice Management and clinical software capabilities are differentiated by our continued investment and customized tools that address specific practice challenges.

We have an industry leading presence with more than 40% of dental practices and more than 55% of animal practices in North America using our Practice Management solution platform and a significant installed base of many international markets -- in many of these international markets.

This software is a backbone to efficient practice operations from housing clinical records and processing eClaims to credit card processing and patient reminders.

We take a holistic approach to developing systems -- system interoperability in the practice to ensure an efficient and seamless end-to-end workflow.

For instance, Dentrix Enterprise is designed to work with more than 14 medical solutions -- software solutions, and dozens of equipment suppliers solutions and systems.

It also easily shares data with other solutions providers used by our practice.

Through Henry Schein One, we expect this portfolio to continue to expand, in particular, the offering of powerful tools to help the practitioner operate a more efficient practice so that the practitioner can focus on providing the best of clinical care.

Let's discuss another key element in our value-added approach, the benefit of our Connection's loyalty program, formerly known as Privileges.

With customers who like to partner with Henry Schein for the majority of their annual consumable merchandise and equipment purchases, we'll award our customers with services that are highly valuable to them.

In fact, to date, approximately 60% of our North American dental consumer sales, including DSO sales, are associated with a Connection's program.

Benefits of the program include exclusive discounts with our loyalty program.

Customers receive exclusive discounts and competitive pricing on consumable merchandise and equipment exchange for volume commitments, it's really important to understand [there's often risks] the pricing we give our better customers is a real advantage.

Guaranteed response time, [I'm going to mention zero pay].

Generally, our service technicians will be made available same day for emergency repair services for our Connection customers.

Customized practice analytics.

With the data we collect from our Practice Management solutions, we are able to customize reporting based on specific practice operations that help dentists improve efficiency.

And, of course, the key by-product of that is generate increased patient traffic.

Last year alone, we reviewed more than 5,000 of these customers -- customized reports with our dental customers helping dentists position those practices competitively.

This reporting assists with billing analysis, new product procedures such as dental implants, orthodontics and digital prosthetics and enhancing patient communications, to name a few.

Then there's our concierge service, our lead customers are assigned an internal VIP account representative who is trained to provide a one call convenience for the patient, whether for assistance with product needs or core special services.

We have over 4,200 highly trained field service consultants worldwide supported by over 2,200 sales service representatives that stay abreast of the market developments and hundreds of new products, services and technologies that are introduced to the market each year.

Our goal is to provide customers with the most extensive array of consumable merchandise and pharmaceutical equipment and value-added services from software to financial and office design services, all delivering a high level of customized service and support.

These field sales consultants are supported by specialists focused on different practice styles, specialties, equipment and software and the largest and most effective telesales organization in the business.

With that, operator, we'd like to open this call to questions.

Rae, let's go ahead and start the Q&A.

(Operator Instructions) Your first question comes from the line of Jeff Johnson from Baird.

Steve, on the dental point, I guess, my question is on the general consumables side.

Any further color you can provide as far as, did market strengthen during the quarter?

Was there any change in DSO versus your private practice business?

And maybe any commentary around general consumables versus some of the specialty stuff?

Sure.

So I don't think the market really changed in any significant way during the quarter.

We did take more market share, I believe.

To be fair, we did have a little bit of an easier comparable last year.

But going forward, even post Q2, we did see continued strong revenue growth in the consumable merchandise in North America so we're executing well.

Dental specialties did help a bit because they were in the mid- to high single-digit growth rate, so it was growing a little bit faster than the general consumables.

But again overall, I think market, very stable; and we're really executing well on taking some market share.

That's helpful.

And then as a follow-up question.

Just on the minority interest, you've bought out, I think, the remainder of the Vet minority interest shares in a couple different businesses.

When was that complete?

Is the minority interest line we saw at about $6 million reduction, is that a fair way to think about going forward?

And the corollary on that, if it is, it looks to me like embedded in your guidance then is that margins may be down a bit still in the second half of this year.

We were thinking they might be closer to flat.

So can you maybe help us connect kind of the moving parts there on buying out those minority interests and how to think about margin over the back half of this year?

Sure.

The benefit for minority interests will be a bit greater in the second half because we -- it's basically composed of 2 areas, the first is the Henry Schein Animal Health buyout of the minority interest, which is only a partial quarter benefit because we did it during Q2.

I think it's sometime in the April or early May time frame we did it -- we completed it.

So you'll get a full quarter benefit in Q3 and Q4.

And the second piece of it was related to what we did at the beginning of this year.

We bought out BioHorizons, so that is a full quarter benefit in Q2.

But we do feel like we can continue to get that benefit, again going forward on a full quarterly basis.

Margins, margins have a lot of different moving parts.

So we may be a little bit lighter than we originally planned on operating margins, but we still feel good with the overall business and the overall growth.

And that's why we're raising the bottom end of our guidance.

Your next question comes from the line of Ross Muken from Evercore ISI.

So maybe on the -- just pricing environment in general.

I mean, how would you kind of characterize it against the separate subgroups of sort of consumables -- specialty consumables, instrumentation on the dental side?

And any notable differences, U.S. versus international, just teasing back to kind of the margin commentary?

I think, Ross, it's fair to say that pricing pressures are there to some extent.

Of course, the Internet provides a vehicle for an exchange of information.

I don't think it results in more orders going to online retailers per se, but there is a little bit more openness on pricing.

I wouldn't say it's material, but what this does at the same time is offer us an opportunity to talk to the customer where price is important, about corporate brands and other competitive offerings from certain manufacturers.

Certain manufacturers are responding generally with competitive pricing, and this is both in Dental and Medical.

I wouldn't say it's that much in the agri -- in the pharma side of the Animal Health.

But in Medical and Dental, I think the manufacturers are understanding that in order to maintain or grow their market share, they have to be competitive where this -- a product that is not really massively innovative.

And so this was marginal.

But I think in the end, as we drive more high-margin products and value-added services, I think our -- we will continue with expanding our operating margins, of course, in conjunction with the efficiencies that we're bringing to our business driven by an implementation of more technology.

And your next question comes from the line of John Kreger from William Blair.

Stan, can you just maybe go back to the commentary you made at the beginning of the call about the new strategic plan for '18 through '20 and just maybe expand on that a little bit to the extent you're willing?

What's new in the plan versus the prior 3 years?

And is there anything specific in there relating to Medical since you've made a couple of big moves in Dental and Animal Health?

Yes, let me just go quickly to the Medical.

We are -- first, we are committed to human health care, essentially from a high-level strategic point of view.

18% of GDP is expended on health care.

2/3 of that is in the noncommunicable diseases area, which is essentially driven by and can be reduced by wellness and prevention programs.

This has always been at the heart of Henry Schein's Medical business, the alternate care environment, the best place for wellness and prevention, to take place moving out of the hospital, the surgery centers.

And this is an area we expect to continue to advance.

Of course, organically, and we've shown very good growth there.

We have some very good opportunities ahead of us, sometimes a bit more lumpy, but essentially, this business has done well for years now and we expect it to continue to do well.

And inorganically, there are opportunities to add to that platform.

I think, some profitable businesses that service the alternate care side.

So we remain optimistic.

As far as the strategic plan is concerned, there are 3 major planks.

The first is to continue to drive efficiencies and make our distribution offering more attractive to our customers.

And I'm not sure if this is the time to deal with it, but -- because of -- simply because of time, but Carolynne or Steven can take you through the details.

There's many, many component parts to this, some are just an extension of what we had in '15, '16 and '17 strategic plan.

Other 2 planks are greater -- focus on newer offerings or expanding the offering.

Of course, I think what is important here is an understanding of where technology is heading and how to use technology in our business.

Lots and lots of technological opportunities, we can't afford them all, so we have to focus on what is relevant.

And I think we have some very, very good plans there to increase the efficiency and effectiveness of our distribution business.

The second is expansion of value-added services.

I would say significant down payments of that towards that goal is the creation of Henry Schein One where we're offering not only leading Practice Management systems, in this country and abroad, but also the demand generation software in combination with the Practice Management system for small, midsized, large, for institutions, dental schools.

And the goal here at the end of the day is to increase efficiency in the practice, helped with clinical services, make them more efficient, and drive traffic into the dental office.

So that's a key part of the second strategy, but also a huge number of value-added services that we'll be expanding on or that we're going to continue to expand on and add to in the years to come.

And the third is advancing our brand equity.

We think the Henry Schein brand is well known.

It's trusted.

We think we can advance in that regard on our private brands and other exclusive products.

And in particular, on the specialty side, where we've made sort of terrific advancements on our own brand products, either with manufacturing on our behalf or where we're vertically integrated.

So lots of opportunities in advancing high-margin products under our own brand or brands that we have a control over as well as exclusives.

And we're working with many manufacturers in that regard as well, the whole brand equity strategy is an attraction to many manufacturers.

So it's those 3 areas: advancing the core distribution business, focusing on value-added services and advancing our own brand strategy.

None of these are new strategies.

These -- they have been put in place several years ago, and it's a matter of just advancing and providing significant focus, which was the reason why we believed we needed to spin-off the Animal Health business, which has a different need, a focus, different concepts, different opportunities.

And with the cash we're going to generate from that spin-off, we will be able to invest in both the Animal Health, the Medical business and the Dental business on a global basis.

The next question comes from the line of Kevin Ellich from Craig-Hallum.

Stan, just wanted to follow-up on that.

I mean, clearly, with $1.25 billion, which area seems the most attractive in Medical or Dental?

And would that be domestic or global?

And then for Steve, Animal Health business remains very strong.

Can you give us a little color on the competitive landscape?

And did you say that it could -- the spin-off could slip into early 2019?

So thanks, [Jeff].

First question, what are we going to do with the money?

So what we'll do with the money will be very, very simple.

It's similar to what we've done in the past.

Some of it will go towards buying shares back.

It's the way we've returned cash to our investors.

It's worked out very well for us.

It's relatively cash-free and a cash-effective way of getting cash into the hands of our shareholders, and as I've said, it's worked well.

The remainder, there will be a little bit that goes into working capital, but I don't think much because we expect to be significantly cash flow-positive.

So the majority will go into investing.

And investing will be based on the strategy opportunity, but also the best return on investment opportunities in the short to medium term.

I would say this would be in the Medical and Dental space, geographic expansion, greater market penetration on the distribution side, value-added services for sure.

We think that the Henry Schein One platform presents huge opportunity to expand our presence in the digital community, specifically in regards to getting patients into the dental office.

There's a small dental plan already in there.

We think we can add to that, and a number of software and other opportunities as they relate to the software area.

But then -- and, of course, the specialty area as well.

And adding to that specialty platform are areas that, although we may sell the products, whether it's in medical, orthopedics or diagnostics or specialties like dermatology, which are doing well, aesthetics, to add a greater variety of products, specialty houses, to the platform.

The opportunities are endless.

And the question is to focus, as our Vice Chairman, Jim Breslawski, always says, "Do anything, but not everything." And so we will be focused on the most strategic, but also on the most accretive opportunities for the medium to -- short to medium term.

Just on the second part of your question, Kevin.

So no real significant changes in the competitive landscape in Animal Health that are going to people's attention.

And the second part of your question on Animal Health, yes, we did say that it is possible that the spin closes in early Q1.

We're still shooting for late Q4 closing.

The thing that we really can't predict with great certainty is how long it will take the registration statement to go through SEC and how long it will take to respond to whatever comments the SEC has.

And that's why, because we can't control that and that could be a reasonably short process or a longer process depending on their questions and comments.

So for that reason, we say it's possible it could slip into Q1.

Your next question comes from the line of Erin Wright from Crédit Suisse.

In Animal Health, did you see an incremental impact at all from weather-related items, I guess, in the quarter from the delayed flea and tick season?

Should we anticipate continued strength in the third and fourth quarter?

If you could give us a sense of a quarterly progression and the underlying demand trends you're seeing, that would be great.

Sure.

Probably had a little bit of help, given the warm climate in parts of the country.

But what that does is it typically means that the flea and tick season is a longer season that's starting earlier.

So hopefully, that helped a little bit.

But overall, we still feel good about the end markets and our ability to gain market share in Animal Health.

And the flea and tick season will continue in Q3 and a little bit into Q4.

Okay, great.

And then on clear aligners, in particular, can you speak to kind of the opportunity, how you kind of stack up relative to the competition there?

And then what sort of contributions are embedded in your expectations near term?

Or is it more of a longer-term contributor?

Erin, we are not providing specific guidance nor are we contemplating significant profits in the near term.

This is a launch of our new product offering, which is based on the Sagittal First/Motion 3D system.

It uses a unique combination approach with an intuitive and simplified treatment process.

Whether for minor crowding or cases requiring more extensive work to correct the issues, our system addresses the bite correction upfront with the Motion 3 system, a 3- to 4-month process, before the aligner is introduced.

As a result, we believe fewer aligners are needed.

So this is part of a comprehensive solution, and we believe it's a competitive solution.

Some of which require 60 -- very often, 60 to 80 sets of aligners for a complicated case versus ours, which we believe will be 20 to 30.

So -- and we believe ours is competitively priced.

The bottom line is it's a new idea.

It does use aligners.

We believe we have a significant number of KOLs that are supporting this.

It's been well received.

But it is just one product offering, one value-added solution within hundreds within Henry Schein.

We're very optimistic.

Our orthodontic team are highly capable, highly qualified.

They've worked on this for a long time.

So we're not giving projections right now, but are very enthusiastic that our whole orthodontic offering, as part of our general specialty offering of implants and bone regenerations and endo, will continue to move along in a nice way and is a base -- is, in general, the basis for our statement that we will be moving to more -- over time, to more high-margin products that I think will provide greater stickiness to our customer base.

So no specifics on contribution of profits.

We're just excited to launch and are extremely happy with the reception that our orthodontic team have received from the KOL network.

But remember, it's not a pure aligner product.

It's a combination product that we believe will, in the end, be very effective and will continue to be well received as more patients use this product.

Your next question comes from the line of Steven Valiquette from Barclays.

So a couple of quick ones here.

You mentioned a 18- to 24-month payback on the new restructuring once completed.

I guess, just to clarify, are you able to comment whether you're capturing any material benefit from restructuring in the back half of 2018 in particular?

Does it have a positive impact on the -- the 2018 non-GAAP EPS guidance?

Yes.

On that, there will be some benefit, we believe.

But it's a little early for us to quantify the benefit that will be in the second half because, again, the completion and the timing of those activities is still being calculated.

But we do expect some benefit in the back half of the year as well as going forward.

And it has very attractive returns.

Even at the high end of 24 months, still very attractive returns.

And it's important for us again to do a combination of lower the cost structure as well as free up dollars for alternate investments.

Okay.

And then just a quick gross margin question.

The commentary hasn't really been consistent over time, at least from some of your competitors, on whether the dental gross margins are higher on consumables versus dental equipment.

Just remind us where you shake out on that comparison, again, just -- without giving any specific numbers, for just the -- which one's higher versus the other?

It seems like the commentary's kind of been mixed over time and throughout the industry.

We're just curious where that stands for you guys today.

Yes, for us, we've been consistent.

Our gross margins are higher on the consumables and equipment.

They're both very good gross margins.

But relative to each other, the consumables is a bit higher.

So I'm not sure what you're hearing from other industry sources, but we've consistently said that.

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

Can you talk a bit about your plans to drive higher gross margin like the in-sell of Henry Schein brand products, or some tech investments in other areas?

Sure, David.

Thank you for your question.

I'll give you some high-level and maybe Steven can provide more color.

First of all, it follows really our strategic -- the 3 planks of our strategic plan.

On the distribution side, the goal is to move towards high-value products.

There are some branded manufacturers working with us -- some private brand manufacturers working with us.

In other words, more value for the customer, our products where we're receiving manufacturer support and driving margins.

At the same time, driving efficiencies in the business to drive up the -- drive down the cost and drive up the operating margin.

So all of that goes into the first bucket.

The second bucket, of course, is our value-added services.

And on the dental side, a huge focus on Henry Schein One.

This team has been busy now for over a year working on the integration or the plans for the merger, and now the integration, they've not been focused on sales much, they've not been focused hugely on margin management, but on bringing this significant integration into play.

Just with the team last week, and it's really exciting, the opportunities to use AI, big data, small data, some call it, to advance the practice to drive traffic into the -- practice to drive demand for dentistry, working of course, with the Internet Brands, ownership of WebMD, all very, very exciting opportunities that will drive sales stickiness but high margin, I think we've indicated in prior press releases that we will ultimately expect over the next 2 to 3 years to generate $20 million?

$20 million to $30 million, yes.

$20 million to $30 million of increased profits in this business.

Our team are very optimistic.

And then the last -- the third bucket is our own brands, which includes, of course, the private brand.

And then in the specialty areas where we manufacture products, but also have products manufactured for us.

We're doing quite well in the implants area, expect to do -- to have some strategic additions to that platform, hopefully in the not too distant future, both in implants and bone regeneration areas.

We're doing very well in those 2 areas.

On the endodontic side, bringing innovation to the market, but also having a very good position in the lower priced, also a good product, more generic endodontic treatment arena.

Lots of opportunity there.

And in the orthodontic space, as we described with aligners, but also with our core orthodontic offerings, which have really done very, very well from an innovative point of view and are now gaining market share in this country, and we expect a growing market share abroad.

So you all -- add all of that together and that's what's going to drive.

But, of course, what brings this all together across the company is the advancement of digital technology, interoperability, bringing all 3 businesses together.

Lots and lots of opportunity to really have a one-stop, one Henry Schein solution, to our customers, that I think will drive up margins.

Then also the connection between our Dental business and our Medical business in advancing of wellness and prevention should all, in the end, drive up margin.

This is a carefully thought out plan, no difference to previous years or previous strategic plans.

And we'll execute piece by piece and expect to continue as we have for the past 23 years as a public company, driving up sales, operating margins, EPS and yes, cash flow.

Steven, anything to add?

Yes, I think you've covered it pretty fully.

The only thing maybe I'll add is on the Henry Schein One.

Those synergies that we noted, $20 million to $30 million by the end of year 3 of synergies.

A very high percentage of those are revenue growth and getting a deeper adoption of some of the services onto our software user platforms.

So that will drive higher revenue growth within the technology segment as well as higher margins as those products get adopted.

And similarly, on the specialty products, we are growing the specialty products faster organically than the nonspecialty products as we just talked about earlier on this call.

Plus there is opportunity for inorganic growth from time to time in the specialty area.

So we feel good about continuing to move the mix towards higher-margin products.

We recognize that that's important for our overall financial model.

So those are the only 3 comments I had in addition to yours, Stan.

We have time to take the last question from the line of Jon Block from Stifel.

Maybe 2. First one, I'm going to actually tack on to Steve's earlier question on Dental gross margins.

I know you said consumable higher than equipment, but can you comment on, call it, consumable specialty versus at a basic.

Just curious because it does look like specialty has been and may continue to grow faster than basic.

And then I've got a quick follow-up.

Yes, the specialty margins are very, very good, especially in the more mature business -- businesses.

For example, our implant businesses are quite profitable, and we expect that to become even more profitable over time.

We're investing -- have continued to invest heavily in expanding that platform inorganically and through more efficient production capabilities.

So I think that's an area that has done well for us.

The endodontics is more profitable and also not as profitable as the orthodontics, but much more profitable than the core distribution of dental products in general.

Lots of opportunity there.

And in orthodontics, we're relatively early in the game, but the profits are pretty good.

When I say early, we've been in the business for about a decade, but we've only really seen the benefits from our investments in terms of management, KOLs in the last few years.

But the margin is good and is expected to be greater.

So on balance, this is a business that is much more profitable, the specialty areas in our core business.

Having said that -- and remember, a key part of our core business is also to sell traditional products to those specialists, and that is also a profitable business.

And generally, those specialists have a bigger wallet to spend money on, for example, equipment, and yes, software.

And then I would add one other thing.

We're also advancing our software businesses in these areas.

We announced, although not closed, our investment in a very successful orthodontic software business, I believe that has the largest installed base of orthodontic software, to supplement our endodontic's very good installed base, I think the largest, and likewise with oral surgeons.

Got it.

Very...

Jon, just one other comment.

I just want to make sure I -- if I understood your question.

My comment on gross margins being higher on consumables is true, even after you exclude the specialty products.

It becomes greater from the gross margin benefit, but it's true even excluding the specialty products.

Got it.

Very helpful.

And the follow-up, Steven, for you is can you just talk about, at a high level, where the margin compression may be coming from?

And I'm just curious because a 6.1% adjusted internal growth was one of the stronger numbers in a while.

And then you also had some of the higher-margin dental consumables that came back this quarter.

So wondering if you can call out a division or an area where some of that year-over-year margin compression came from.

Sure.

Well, clearly, it's on the gross margin side.

And there are a couple of factors that we are continuing to invest in to -- as we get future growth, that goes into gross margins.

So for example, on equipment gross margins, our service technicians that do the repair and installation of equipment, is shown -- that expense is shown as part of cost of goods sold.

And as we make investments to expand the capabilities, especially since we expect to significantly grow our equipment, that's having some impact on the dental equipment gross margins.

Similarly, in our technology business, support -- technical support for technology is a significant portion of technical support that is also part of cost of goods sold in the technology business.

And again, as we make investments in that area in anticipation of the ramp with Henry Schein One, you're seeing some impact in those 2 areas.

You have to make the investment prior to the actual sales coming, so that's why you're seeing a little bit of the impact on the lower margin this quarter.

And hopefully, that will reverse itself as we get additional volume in future quarters.

So operator, I think we need to end the call now.

So let me make some closing comments.

We are, of course, pleased with the results for the first half of 2018.

We've continued to advance our intellectual capital and the value-added solutions that we offer to our customers, and I would say driven by a highly motivated Team Schein.

Spent a lot of time in the field in the last quarter from Asia to Europe to North America, and I would say the morale is really good.

This is a key differentiator in our go-to-market strategy.

The fact that our team is so highly motivated in advancing plans to improve on our customers, practice efficiency, provide them with tools to provide better clinical care.

And our customers rely on us as trusted advisers to understand their challenges and pain points.

We're offering practitioner solutions and services to really help them manage their practice and achieve their goals.

We have a lot of exciting strategic initiatives underway as part of our 3-year strategic plan.

I believe we are highly focused.

The team is -- motivated [ourself], as I've said, and believe it's well positioned for another successful 3 years to execute another successful strategic plan.

So thank you for joining us.

Thank you for your interest in Henry Schein.

If you have any further questions, please feel free to contact Carolynne Borders in Investor Relations at (631) 390-8105.

Steven's also available at (631) 843-5915.

And look forward to speaking to you again when we report our third quarter numbers and results and performance in November.

So have a good rest of the summer.

Thank you very much.

This concludes today's conference.

You may now disconnect.