漢瑞祥 (HSIC) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein Fourth Quarter and Full Year 2018 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, Tiffany, and thanks to each of you for joining us to discuss Henry Schein's results for the 2018 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 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, February 20, 2019.

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

Thank you, Carolynne.

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

2018 has been an historic and extremely busy year at Henry Schein as we further position the company to advance our 2018 to 2020 strategic plan.

First, we announced the spin-off of our global Animal Health business which is now complete.

We believe that Covetrus represents a significant global technology-enabled provider of products and services for the companion animal health market.

We expect customers as well as suppliers will benefit from the technology, practice management software and insights offered by Covetrus to help drive better clinical outcomes for pet patients.

This past year, we also announced the formation of Henry Schein One, which advances practice efficiency and clinical effectiveness while pairing our dental practice management software with the new demand generation tools to help customers better communicate with patients and to drive increased traffic into the dental practice.

This joint venture will not only, of course, be a way to advance our general sales with our dental customers, but will provide organic growth and a terrific platform for inorganic and acquisition bolt-ons to make this business even more effective over the years to come, is already quite profitable, and we expect it to be even more profitable.

Last, we began restructuring effort, which Steven will discuss further in detail and this also required a great deal of focus for most of the year and in particular, the last 6 months of the year.

Together, these efforts are strategically positioning Henry Schein for continued success, and we want to offer a special thanks to our Team Schein Members across the globe for the significant contributions to these important efforts.

Let me add, although challenges in implementing all 3 of these initiatives, generally, the morale in the company is very good, and generally, these programs have been successfully implemented.

The work involved in the spin-off was significant, likewise with Henry Schein One and also the restructuring program.

As we begin the new year, we are most excited about the future of Henry Schein.

We believe the long-term business opportunities remain attractive in the global dental and medical office market as well as the ultimate care sites.

This is where we're focused.

We're focused on wellness and prevention, and we believe this is where health care needs to be heading and is indeed heading.

And we believe we're in a very good spot to continue to advance shareholder value.

We also believe our long-standing strategy of organic and acquisition growth will enable us to continue to build upon our market share positions over time as we offer the broadest range of solutions in the markets we serve, including medical and dental supply chain and specialty products and services solutions as well as dental technology through, of course, Henry Schein One.

At this time, I'll ask Steven to review our financial results and guidance.

And then I'll provide some additional commentary on our recent business performance and accomplishments.

Steven, please.

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 on an as-reported basis, the GAAP basis and also on a non-GAAP basis.

Our Q4 2018 and Q4 2017 non-GAAP results exclude certain items that are detailed in Exhibit B of today's press release, which is available in the Investor Relations section of our website.

We believe the non-GAAP financial measures provide investors with useful information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently 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 corresponding GAAP measures.

For a detailed reconciliation, see Exhibit B in this morning's earnings release.

Also, to facilitate comparisons against past results, we are providing unaudited financial information for the years 2016, 2017 and 2018 and for each quarter of 2018 on a continuing operations basis, so excluding the Animal Health business.

This can be found on Exhibit C and D of today's press release.

If we turn to our results for the quarter.

Net sales for the quarter ended December 29, 2018 were $3.4 billion, reflecting a 1.7% increase compared with the fourth quarter of 2017, with internally generated sales growth in local currencies of 2.1%.

When also excluding the impact of certain products switching from direct sales to agency sales, our normalized internal sales growth in local currencies was 2.6%.

You can see the details of our sales growth that are contained in Exhibit A of today's earnings news release.

On a GAAP basis, operating margin for the fourth quarter of 2018 was 5.3% and contracted by 195 basis points compared with the fourth quarter of 2017.

However, on a non-GAAP basis, which excludes the restructuring costs, transaction costs related to the Animal Health spin-off, our operating margin was only down 30 basis points on a year-over-year basis.

Full year 2018, excluding the same factors as noted above as well as certain onetime litigation expenses in both periods, our operating margin was down 17 basis points compared to 2017.

Again, you can see a reconciliation of GAAP operating income to non-GAAP operating income in the supplemental info page on the Investor Relations page of our website.

As we have previously mentioned, we are focused on increasing sales of higher-margin products and services to drive gross margin improvements across all of our businesses and a continuing effort to reduce cost as part of our restructuring initiative.

Turning to taxes.

Our reported GAAP effective tax rate for the fourth quarter of 2018 was 19.2%.

This compares to a GAAP effective tax rate of 90.4% in the fourth quarter of 2017.

However, on a non-GAAP basis, the effective tax rate was 23.5% and compares with the prior year non-GAAP tax rate of 27.7%.

On a full year basis, the effective tax rate was 22.4% on a GAAP basis, and that compares to a GAAP effective tax rate of 44.1%.

But again, on a non-GAAP basis for the full year, the effective tax rate was 23.8% and compares to 26.8% in 2017.

Again, you can see a reconciliation of GAAP and non-GAAP tax rates in the supplemental information page on the IR section of our website.

For 2019, we estimate our effective tax rate will be in the range of 24% to 25%, and that's also on a non-GAAP basis.

Moving on.

Net income attributable to Henry Schein, Inc.

for Q4 of 2018 was $133 million or $0.87 per diluted share.

And this compares with the prior year GAAP net loss of $8.5 million or $0.06 per share.

Non-GAAP net income for the fourth quarter of 2018 was $171.6 million or $1.12 per diluted share.

And this compares with the non-GAAP net income of $152.1 million or $0.97 per diluted share for the fourth quarter of 2017.

This represents growth of 12.9% and 15.5%, respectively.

To provide some additional detail on our results, we note that the amortization from acquired intangible assets was $30.4 million pretax or $0.15 per diluted share for Q4 of the current year.

That compares to $28.3 million pretax or $0.13 per diluted share for Q4 last year.

On a full year basis, the amortization from acquired intangibles was $122 million pretax or $0.60 per diluted share for 2018, and that compares to $112.4 million pretax or $0.52 per diluted share for 2017.

I'll also note that in the current quarter, Q4 of 2018, foreign currency exchange negatively impacted our EPS by $0.02.

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

Dental sales were $1.7 billion, which is a decrease of 0.2% compared with the prior year with internal growth in local currencies of 1.5%.

North American internal growth in local currencies was 0.6% and included 2.5% growth in sales of dental consumable merchandise where we believe there was some softness in the end market, most notably in the November and December periods.

But we do believe we continue to gain market share in the North American dental consumable merchandise market.

Our dental equipment sales and service revenue decreased by 3.5% year-over-year.

It's important to point out, though, that this was against a very difficult prior year comparison where we experienced adjusted internal sales growth in local currencies above 19%.

We also believe dental practices were focused on some year-end optimization of some practice tax structures rather than on tax advantages associated with capital purchases.

And we believe this could have negatively impacted Q4 sales as well.

Turning to international.

Our international dental sales growth in local currencies was 2.8% and included 3.4% growth in sales of dental consumable merchandise.

And our dental equipment sales and service revenue increased by 1.3% versus the same period last year.

I'll note that the biennial international dental trade show or IDS takes place in Cologne, Germany in mid-March.

And this -- generally, the timing of this often impacts lower international equipment sales in Q1 that typically pick up in Q2 and beyond.

Animal Health sales were $877.6 million in the fourth quarter, a decline of 1.4%, with internally generated sales in local currencies down 0.6%.

These results included 1.9% sales decline in North America.

However, normalizing for the impact of a manufacturer switching from direct to agency sales, our North American sales growth was 2.1%.

International Animal Health internal sales growth in local currencies was 0.8%.

Our Medical sales were $684.8 million in the fourth quarter, an increase of 7.5%, with internally generated sales growth in local currencies also at the 7.5%.

And acquisition growth was small, up 0.1%, and that was offset by foreign exchange of the same amount, 0.1%.

That 7.5% internal growth in local currencies included 7.7% growth in North America and 2.1% growth internationally.

We are pleased with our overall Medical sales results which continue to be driven by -- primarily by solid growth from existing large customers as well as, to a lesser extent, new customer additions.

And this was despite the fact that there was a below average influenza season that led to fewer physician office visits and related tests.

This was probably the mildest flu vaccine or flu season that we've seen in a number of years.

Technology and Value-Added Services sales were $139.1 million in the fourth quarter, an increase of 21.4%, with internally generated sales growth in local currencies of 0.5%.

In North America, the Technology and Value-Added Services' internal sales growth in local currencies was flat versus the prior year, reflecting lower sales from technology support and financing services revenue associated with the decline in dental equipment sales in North America.

International markets, the internal sales growth of technology was 2.8%.

And we expect to see an acceleration over time in our technology sales driven by Henry Schein One as practices leverage those key tools, including the availability of integrated practice management software systems with the Internet Brands offering to enhance practice efficiency and patient communications.

Related to stock repurchases, we continue to repurchase common stock in the open market in the fourth quarter.

We bought back 997,000 shares at an average price of $86.14.

Remember, that's on a pre-spin-off basis, that $86 share price.

And that was approximately $86 million.

The impact of these repurchases on the fourth quarter EPS was immaterial.

Also, I'll remind people that on December 13, 2018, we announced that our Board of Directors authorized the repurchase of up to $400 million of shares of our common stock.

That's an additional increase.

And at fiscal year-end, we had that $400 million authorized and available for future stock repurchases.

If we look at some of the highlights of cash flow for the quarter, our operating cash flow for the fourth quarter was very strong at $294 million compared with $238 million in the fourth quarter of last year.

For the year, the operating cash flow was $685 million versus $545 million in 2017.

Also, I'll note that our capital expenditures for the year was about $90.6 million, and that results in free cash flow of $594 million for the year.

I'll also remind people that as part of the spin-off, we received a $1.1 billion tax-free cash proceeds that was distributed to us at the closing of the Animal Health transaction, which was during the first quarter of 2019, that was initially used to pay down corporate debt.

Also, early in the year, we repurchased a minority interest associated with the Animal Health business in the U.S. Animal Health business in the amount of approximately $365 million.

Our Animal Health subsidiary subsequently engaged in a primary issuance of shares to third parties for cash consideration, which was also distributed to us in connection with the spin-off transaction.

We expect to continue our long-standing capital allocation, which is focused on 2 key initiatives: strategic acquisitions as well as share repurchases.

Looking ahead to future M&A.

We expect to continue to pursue our 2018 and 2020 strategic plan by continuing to grow our Dental and Medical businesses, both in North America as well as internationally.

Also, to enhance our value-added solutions, investing in building scale and expanding into higher-margin products.

This is expected to include adding higher-margin dental technologies to the Henry Schein One platform aimed at improving practice efficiency and creating patient demand for our customers.

We also expect to continue to invest in dental specialty solutions for implants, bone regeneration, endodontic, orthodontic products, which will complement the growth profile of our traditional Dental business.

In addition, we plan to invest as opportunities arrive in the medical market, such as what we just recently announced in the North American Rescue business, which Stanley will discuss shortly.

As part of our previously disclosed restructuring initiative, we recorded a pretax charge in Q4 of 2018 of $35.4 million or $0.17 per diluted share.

The charge for the full year for restructuring activities was $62.9 million on a pretax basis or $0.31 per diluted share.

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

We plan on extending this restructuring initiative into the first half of 2019 as we continue to look for more opportunities to save costs, as we continue to look to migrate stranded costs, which are modest this year but we still want the opportunity to mitigate those stranded costs over time that are related to the Animal Health spin-off as well as advance our technology investments, including reinvesting in our CRM, ERP and web interface development.

Okay.

Turning to guidance.

We are introducing financial guidance today for 2019.

At this time, we are not able to provide estimates for the continued costs associated with restructuring as well as the Animal Health spin-off that occurred earlier in 2019.

Therefore, we are not providing GAAP guidance.

We will only be providing non-GAAP guidance excluding those 2 items.

On a non-GAAP basis, the 2019 diluted EPS attributable to Henry Schein is expected to be $3.38 to $3.46, and that reflects growth of 7% to 9% compared with the 2018 non-GAAP diluted EPS from continuing operations of $3.17.

Again, if you look at our press release, you'll see that $3.17 is provided as a non-audited additional financial information for Henry Schein on a continuing operations basis.

The company's Animal Health business was spun off to shareholders on February 7, 2019.

And that business will be classified as a discontinued operation in Q1 2019 as well as for all current and prior year -- prior periods that are presented post Q1 2019.

Note that we currently expect the year-over-year non-GAAP EPS growth in the first quarter of 2019 to be in the low single digits with an acceleration for the remainder of the year.

Our guidance for 2019 non-GAAP diluted EPS attributable to Henry Schein again is for continuing operations and includes completed or previously announced acquisitions, but does not include the impact of potential future acquisitions as well as it does not include the impact of those non-GAAP adjustments.

The guidance also assumes foreign exchange rates are generally consistent with current levels and that the end markets remain stable to current market conditions that we are seeing.

So we remain confident in our goal of achieving long-term organic sales growth of 1 to 2 percentage points above the underlying market growth rates.

We also remain confident that non-GAAP diluted EPS growth will continue to be in the high single to low double-digit percentages for Henry Schein, Inc.

on a long-term basis.

And that's all-in including stock repurchases as well as contributions from acquisitions.

So with that financial summary, I will now turn the call back over to Stanley.

Thank you, Steven.

Before I review highlights from the fourth quarter, I would like to review several highlights of 2018.

We achieved net sales of $13.2 billion, which is up 5.9% from the prior year; internal sales in local currencies increased by 3.4%; GAAP diluted EPS increased by 35.8% versus 2017 GAAP results and non-GAAP diluted earnings per share growth was 14.7% versus 2017 non-GAAP results.

We are, of course, pleased with our operating cash flow of $684.7 million, which increased by $139.2 million versus 2017.

We did not repurchase shares during the period of time before we announced the spin-off of our Animal Health business.

Following the announcement in April, we spent $200 million to repurchase approximately 2.5 million shares of our common stock in 2018, reflecting our confidence in the strength of our business and our commitment to continuing to deliver shareholder value.

In addition, during the year 2018, we completed 5 majority-owned, strategic transactions, excluding Animal Health transactions, just Dental and Medical, as we continue to expand our geographic presence and enhance our product offering.

Together, these acquisitions have trailing 12 months revenue at the time of purchase of approximately $132 million.

We also announced the formation of Henry Schein One, which had pro forma 2017 sales of approximately $400 million.

Our acquisitions in 2018 expanded our digital dentistry solutions for implants and orthodontics.

And in Medical, we announced an agreement to acquire a leading provider of mission-critical medical products for the defense and public safety markets, North American Rescue.

Going forward, we have significant opportunities to allocate capital towards advancing our 2018 to 2020 strategic plan, which is centered around 3 concepts, 3 major goals.

First, on the distribution side, the goal of expansion of our core dental and medical businesses as we continue to build scale and expand into new geographies.

Supplementing that with number two, value-added services, advancing our solutions, services and support for our customers.

Of course, a key component of that is Henry Schein One, but there are other initiatives and other programs that we will be advancing.

And the third component is partnering with a broad set of manufacturers as well as building Henry Schein's brand equity with the key goal of expanding product margins.

So for the fourth quarter of 2018, let me start with a review of our Dental business.

Steven mentioned that the fourth quarter dental sales in North America were impacted by a soft end market in November and December.

Also, our global sales in the CAD/CAM category declined by approximately 7%.

As Steven noted, we faced a difficult comparison in North American dental equipment for the fourth quarter of 2017, remember, was the first full quarter that we had access to the Dentsply Sirona dental equipment line in the U.S., which we believe contributed to a difficult comparison in the fourth quarter and specifically around CAD/CAM.

We are on the early stages of adoption of digital solutions for dental practices and dental laboratories, including CAD/CAM products.

The market there, we estimate, is still less than 20% penetrated in the U.S. Without question, the dental market will continue to adopt digital technology as digital devices drive practice efficiency and productivity.

Growth in this market over the coming years is expected to be healthy.

Internal sales of North American traditional equipment grew by 3.8% in local currencies during the fourth quarter.

This was off solid sales growth in the fourth quarter 2017.

We believe this market will continue to grow as well.

We believe investors should not be overly focused on quarterly growth rates, which may ebb and flow from quarter-to-quarter.

We believe the end markets for dental consumables, digital equipment and traditional equipment are all growing.

We remain optimistic that long-term growth prospects remain attractive, and we expect that we will continue our trend of building upon our market share positions.

As you may recall, in late September, we announced investments in 3 implant companies: Intra-Lock, Medentis Medical and Pro-Cam Implants with combined annual sales of approximately $45 million.

The implant orthodontic and endodontic markets represent particularly attractive growth segments where we can leverage our deep relationships with both specialty practitioners and GPs.

Our investments in these companies speak to our commitment to adding high-margin digital treatment solutions that are advancing dentistry through technology and yes, innovation.

Before we move on, let me comment on an agreement we recently signed to acquire a majority stake in Wuhan Hongchang, one of the largest independent dental distributors in China.

The company has annual sales of approximately $40 million.

China is an important market for dental services as the dental clinics, the private sector dental clinics, continue to experience rapid growth.

In 2018, we had approximately $60 million of dental sales in China and expect this to grow significantly in 2019 and beyond as we continue to invest in growing our presence in developing markets.

We believe there is significant opportunity to deliver our unique combination of solutions, service and support to the China region as well as other emerging markets.

Now let's move on to the Animal Health business.

We are pleased to have closed on the spin-off of our global Animal Health business which is now part of Covetrus.

The company has an impressive board made up of 11 leaders in the industry.

We are pleased that Phil Laskawy, the Independent Lead Director for Henry Schein for many years, is the Lead Director of Covetrus.

Steven Paladino, our CFO, also serves on the Covetrus board, among many distinguished colleagues.

I would like to take this opportunity to thank all of the former members of the Animal Health team.

For many years, the Team Schein Members devoted to the Animal Health part of Henry Schein were very productive for the company.

We've created tremendous shareholder value.

And the commitment over so many years of this team is most appreciated.

The team has a strong passion and dedication to the animal health community and therefore, the combination of Henry Schein Animal Health and Vets First Choice capabilities position this team and Covetrus as a company for a bright future.

Now let's take a look at the Medical business.

We are pleased with the robust growth in our Medical sales for the quarter at 7.5%.

The North American medical market continues to experience a rapid evolution as health care providers pursue the best way to deliver services at lower cost and with better outcomes, of course.

We are benefiting from the shift in care from high cost acute settings to lower cost subacute care sites, such as physician offices, urgent care sites and ambulatory care centers that we serve.

Our track record in serving large group networks with supply chain, education, technology and support services continues to be a solid competitive advantage.

Our Medical business is thriving in this environment as we service these large entities.

In January, we announced the signing of a [definitive] agreement to acquire approximately 93% of North American Rescue or NAR, N-A-R, as it is referred to in the marketplace, which is a leading provider of survival and casualty care medical products to defense and public safety markets.

NAR has an expansive line of proprietary product brands.

The company has 105 employees and generated record sales for the 12 months ended October 2018 of approximately $184 million.

We believe NAR will help expand our Medical group's geographic footprint, customer base and product offering as well as margins in both the U.S. and as we advance the NAR business across the globe.

Let's move on to our Technology and Value-Added Services business.

Henry Schein One has just completed its first 2 quarters as a combined platform and is now positioned to start offering unique software bundle solutions for improved communications between the practice and the patient while, of course, driving efficiency and good clinical outcomes in the practice as well.

Henry Schein One is helping to advance practice efficiency and to build strong relationships between dental practices and patients.

It is also creating new avenues of growth for practices with differentiated demand creation tools.

We are offering our customers a host of new tools to engage with their patients while simultaneously increasing our recurring revenue.

We also have the opportunity with this exciting platform to expand our dental software presence across the globe, particularly as we pair these tools with a growing practice management software presence abroad.

We are pleased to announce that Dentrix Enterprise solution, along with Cerner solutions, was selected for the contract with the Department of Veterinary Affairs (sic) [Department of Veterans Affairs] as part of the project to modernize health care solutions for the military.

Recently, Henry Schein One rolled out several new key platform updates for patient engagement, patient financing and clinical decision support solutions.

We also launched our OmniCore all-in-one dental office network solution, which includes hardware and dental office maintenance.

Looking ahead, we are working on new product launches to attract new patients to our customers as well as live chat solutions aimed at improving conversation rates as patients search online for a dentist.

Henry Schein One has a lot of projects underway and will serve as a platform for future technology acquisitions to expand our value-added solutions in other geographies and to target general practitioners as well as specialty practitioners, including the previously announced unconsolidated investment in Ortho2, a leading provider of practice management software solutions for orthodontists in the United States and Canada.

Before we open the call to questions, I would like to address some concerns we have received from the investment community about gross and operating margin.

I really think it's important to reiterate thoughts that we have conveyed for some time.

First, we recognize that we have, we always had, we've been and we'll continue to operate in price-competitive markets.

The markets we are in have always been price-competitive.

Our strategy of delivering value-added solutions for our customers that help clinicians manage their practices efficiently is critical.

This helps our customers operate more successful practices, both from the clinical point of view and an economic point of view.

We also recognize that practices are changing.

Consolidation will continue, but we believe at different rates in dental and medical.

I would like to point out our success in continuing to bring value to our large customers and to navigate consolidation in the medical market where today a majority of smaller practices are owned by larger group networks.

We continue to deliver consistent, attractive sales and profit in this business.

We believe our medical and dental customers continue to choose Henry Schein because we are partners to practitioners and effectively serve as an extension to their practices.

Our price levels fairly reflect the value we provide.

It's a careful balance that we work on daily.

We do not expect this to change materially over time even as our customers continue to consolidate.

Rather, we expect practitioners will continue to compensate us for the value we provide.

Second, we have discussed the priority of adding more high-margin products to our portfolio.

The recent implant acquisitions in dental and agreement to acquire North American Rescue in medical are excellent examples.

We will also continue to invest in building scale in distribution in all of our key markets as we position the company to grow in these important markets.

Our capital structure and strong balance sheet position us well to continue to add more of these businesses in the future.

Finally, we believe our success in effectively managing gross margin and cost -- and this has been a long-term history of ours, aided by our recent restructuring efforts -- will help us achieve our long-term operating margin expansion goals.

With that, operator, let me open the call to questions.

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

Can you hear me okay?

Yes, we can.

So I just wanted to focus on guidance here for a second and kind of even your 2018 base number of $3.17.

So Steve, I think we're all trying to circle around 3 different factors.

There are stranded costs that are impacting.

There are the TSA agreements with Covetrus that should help at least in 2019.

And then there was the cash infusion from Covetrus, the $1.1 billion.

So in that $3.17 number, I guess my question is, are there any impacts of any of those 3 factors?

And then how are you thinking those 3 factors combine to impact then the 7% to 9% growth guidance for 2019?

Okay.

So the 2018 numbers, there are no real impact related to stranded cost because nothing is stranded during 2018.

And there is no impact to TSAs and reimbursement in 2018.

And last, since we didn't get the cash until first week of February 2019, the impact of the $1.1 billion is also not included in 2018.

But let me address those issues in 2019 because I understand there is a little bit of confusion on that.

First, on the cash infusion, it's 11 months' worth of impact, but it's important to note a couple of things on our interest rate line.

One is that we had temporary credit lines in place in anticipation of getting that $1 billion-plus cash infusion.

Those temporary credit lines had low interest rate because they were floating and low interest rate credit lines.

We also have assumed that there will be some rate increases in 2019.

Now who knows if that's going to happen or not, but for conservatism, we did assume in our guidance that there would be some rate increases in 2019 that will increase our overall interest expense.

Turning to stranded costs.

We do expect to have a modest amount in 2019 of stranded costs.

We expect that to be in the several million dollar range.

That could change a little bit, but that's the expectation now that's built into our guidance.

We also expect that when you look at the costs in 2018, it does not include certain variable costs that will increase in providing those services to Covetrus.

So the 2019 expenses will be higher because there'll be more variable expenses that will be chargeable to Covetrus to perform those services.

And the last thing maybe I'll point out is, we're still expecting -- you see in Q4 that foreign exchange currency translation negatively impacted our quarter by $0.02 per share, just for the quarter.

So we're expecting to have a little bit of continued headwind in foreign exchange built into our guidance.

And maybe the last thing I'll mention, sorry for such a long-winded answer, is that we saw in Q4 a soft market in a couple of markets.

And we are also assuming that market conditions remain consistent.

So we're assuming that, well, let me say it in the opposite.

We are not assuming that market conditions improve.

Now we're hopeful that, that can also be a conservative assumption.

But right now we think that's the best way of building our guidance, assuming the market conditions remain consistent with what we've seen in recent history.

That's helpful, Steve.

And then just my quick, very quick follow-up.

On the amended 8-K that you filed on Friday and the restated pro forma numbers for 2018 year-to-date had come down in that filing.

Did those numbers come down because of stranded costs or did those numbers come down because you just allocated or reallocated and decided that there were more costs remaining on the business that forced you to do that or that required you to do the restatement of the 8-K?

Yes.

So it was the latter.

It was not because of stranded costs.

It was because when we filed the initial 8-K, and it's a very complicated separation of costs between continued and discontinued operations, and we made estimates for what pertained to continued versus discontinued operations.

And as we continue to refine those numbers, we realized that those estimates were not as accurate as we would have liked.

And therefore, we filed the 8-K/A last week to adjust for that.

Your next question comes from the line of Nathan Rich with Goldman Sachs.

Maybe just sticking on guidance.

You talked about EPS growth of 7% to 9% from continuing operations.

That, I guess, is the lower end of the longer-term target of high single to low double digits.

So Steve, could you maybe just talk about what's unique to this year that's causing growth to be at the lower end of that range?

And maybe within that, could you also comment specifically on your expectations for margins?

It looks like pro forma margins were roughly flat.

I'll just be curious what you're expecting for 2019.

Sure.

Some of the things I said on the earlier questions, I'll repeat.

There is an impact of stranded costs in 2019.

We are anticipating some foreign exchange headwind.

Maybe another thing I'll mention is -- that we talked about on the prepared comments.

If you look at the flu season this year, it was the mildest flu season in many years.

And while that did not impact our sales of the influenza vaccine, it did impact and we're seeing that continue in Q1.

We're seeing that patient traffic for when patients have flu-like symptoms and they go to their doctor and there's the rapid in-office flu test that's used, those flu test product sales are down in Q1 because, again, such a mild season and the patient traffic.

So using other products that you would normally use when you have a patient flow is also down.

That's a temporary thing because the flu season really is the winter months and ends after Q1, but we are assuming softness related to that.

It's a very unusual season, and we just have to build in the reality of that as part of our guidance.

Okay.

And then just maybe quickly on margins, just your expectations.

There are a number of moving pieces just with the restructuring savings that you expect, and some of the stranded costs like you said.

So just be curious how we should be thinking about margins for this year.

Yes.

Look, our long-term goal is to get back to operating margin expansion.

I think that we may not get there in 2019 because of stranded costs and some of the other factors that we just discussed, but we do believe longer term we can get there.

So again, 2019 is a little bit of a transitional year with all the spin-off activities that we have to take into consideration.

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

Stan, you mentioned a few minutes ago that product is the third of your 3 main goals longer term.

Can you just elaborate on that?

How do you determine what products you want to own versus you want to partner for?

And if we think about your sales, what percentage would you like to get into some sort of a kind of a preferred formulary type of structure?

And any additional details would be really helpful.

Thank you, John.

That's a very, very good question.

I'm glad you asked.

Look, there are 3 legs to the Henry Schein strategy for 2018 and '20.

The first is to continue to advance our distribution businesses.

I can go into details, but that's not related to your question.

The second is to continue to invest and expand our presence with value-added services.

There are 2 kinds of services.

Some are given free or virtually free to customers who give us consumable and equipment business.

And others, such as the programs that Henry Schein One offers, are charged for.

So there, obviously, we want to expand on that platform.

And we'll connect with suppliers and different partners that are interested in working with us to help us expand that platform, the profitability of that platform and the connectivity to our customers so that we can be totally interoperable in a unique way.

But I think your question is more directed to the third category, what we call internally brand equity.

The cornerstone of that, of course, is our specialty businesses.

We're particularly interested in advancing our oral surgery business that involve implants and bone regeneration materials and using that to be a one-stop shop for all products that an oral surgeon or a GP in the oral surgery field are using.

We are doing quite well in that field.

We are gaining market share.

We have made some good investments.

And we expect to continue to make good investments in that field.

The second area will be in the endodontic space, similar goal.

We, of course, will distribute all brand, but we'll also have our own brands, from Brasseler to Edge, and I'm sure others will be added over time.

This is a high-margin business for us.

It presents us with a good opportunity.

Although we will continue to collaborate with those branded manufacturers that would want to collaborate with us where other brands are offered through the Henry Schein channel.

And the third is the orthodontic space where we will continue to invest.

Again, we are making good progress.

We have some good proprietary products in that field and specifically related to our SLX Clear Aligner System and the whole system around that.

And we believe that over time that will continue to do well.

We are receiving very good feedback from our KOLs and from customers in that regard.

So the goal is specifically in those areas where we are not really competing with our manufacturers who work with us through distribution.

And we do not see ourselves being a manufacturer of equipment and -- so for example, and so we will focus on areas where we believe the margins are great, where we can provide good value to our customers and can combine our own brands with a complete offering of other products to present a one-stop shop.

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

Steven, this one might be for you or I'm sorry, Stanley as well.

But just want to make sure on the trends that I circle back here.

So on the North American trends that you called out that weakened a little bit in November and December, I mean, here we are almost at the end of February.

Any color that you can give on how those trended in January and February as well?

And then, I guess, a quick add-on to that same question would just be, also any difference that you saw in, call it, general consumables versus specialty because I do think specialty has been more resilient in the past.

And then I just got a quick follow-up.

Sure.

So let me answer the second part of your question first.

Specialty sales were stronger than core GP sales.

In fact, for us, we saw our implant business growth in the 7% range, organic growth in the 7% range, which was a strong number for us.

And we also saw on other specialties some nice growth in excess of the recorded growth.

What we saw specifically in the U.S. and North American market was that, that softness really continued in January, but we did see a really nice pickup so far in February.

So we're a little bit optimistic with that pickup because February so far has been very strong, but it's only, call it, 2 weeks into the February month.

So that's the color I can provide, and that's both on consumables and equipment.

Softness in January continued, but a nice turnaround in February for an acceleration of that growth.

Let me just add one other factor.

And it's not directly related to Steven's answer per se and maybe your question.

But the profitability of Henry Schein One and the profitability of our specialty businesses are significantly higher than the distribution business.

So although the impact to the top line, our growth in these businesses may not be that material or may not be obvious, the bottom line increase is quite important.

And in fact, even if we don't have much growth and we expect to have a lot of growth, the profitability increase in these businesses is very, very good.

So the opportunity to have growth in operating margin and bottom line profitability or operating income profitability from Henry Schein One and the specialty businesses is, of course, therefore, disproportionate to the sales growth of the distribution businesses.

Okay.

Fantastic.

And this is the follow-up question and it's sort of built on maybe Nathan's from earlier.

But just longer term, Steven, the op margin goal for the company, you talked about why it may be flat this year.

You've got some stranded costs.

You got some FX headwinds.

But when we look out longer term, you used to talk about 20 bps of OM expansion for the legacy co.

Do we see you guys sort of recapture 20 bps longer term?

Does it even work beyond that as, Stanley, to your point, you made some acquisitions and bolt-ons in some of these higher-margin businesses, such as specialty, Henry Schein One, et cetera?

Sure, Jon.

You're correct.

We do feel confident longer term to get back to operating margin expansion.

Again, this is a little bit of a transition year, 2019, because of the spin-off and other activities.

That does not assume any major shift in sales mix to higher margin.

We're still targeting that longer-term margin expansion of 20 bps.

But if the shift is greater through acquisitions, that could accelerate 20 bps to a higher number.

So we still feel like that's a model that we can continue to achieve.

We just have to get through 2019 in this transitional year.

And of course, our guidance -- to add on to Steven -- does not include any acquisitions.

We cannot, of course, commit to any acquisitions until the paper is signed.

But we will be investing quite heavily in these 2 legs of high margin.

One is Henry Schein One.

It's a tremendous platform and a great way to add additional services, additional geographies to the Henry Schein One platform.

So lots of opportunity there for margin expansion.

And likewise in the specialty areas where we remain excited and think that we have opportunity to continue to grow market share in a market that is quite healthy.

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

I guess, Steve, you gave us some nice color on the softness that you saw in the dental market in North America and kind of how it's bounced here in February.

But were you ever able to pinpoint what caused the softness?

I mean, is it really just kind of a resetting as to what market growth is for the market?

It's difficult to answer with precision.

We did see the large corporate accounts grow faster than the independent customers.

We didn't see anything specific geographically or regionally.

Obviously, it was related to patient traffic and utilization.

So again, we're trying to continue to do analytics on that, but it's difficult to understand with precision.

So again, reflected in our guidance is a continued slightly softer market expectations that will continue.

Again, we still feel we can grow.

Assuming we achieve our guidance of high single digits, 7% to 9% growth in this environment, and the opportunity for that to accelerate over time through acquisitions, other activities and maybe even a little bit of help from the end markets.

We feel that that's something that will continue to deliver shareholder value for our shareholders.

That's helpful.

And then, Stan, when we think about your growth strategy, and you gave some color on the high-margin equipment and digital areas that you want to get into.

Can you talk geographically about the emerging markets?

You mentioned China as a big opportunity.

Kind of will you build that organically or do you think an acquisition is more of the right way to go about building in the emerging markets?

It's a very good question, Kevin.

Of course, the emerging markets are growing rapidly off a smaller base.

The answer is slightly different per country.

China now, we've been there for almost a decade and feel very comfortable now that we have the right infrastructure, financial, regulatory, legal to advance.

We have a $60 million business.

We will close shortly on another $40 million, and we will continue to grow organically.

It's a great platform, by the way, to advance our implant businesses, which are doing quite well with us in China.

So it's going to be, in China, a combination of organic growth and expanding the platform so that we have good distribution throughout China.

Brazil, for example, which is now a nice business for us, we put together the #1 and #2 player.

They went through last year the integration process.

And I expect that we will continue to have good growth and profitability in Brazil.

I expect that there will also be some acquisition opportunities and specifically in the specialty areas as well.

We have a small operation in South Africa, which is an opportunity to expand north.

Although not a huge market, it's a growing market.

And in other parts of Asia, for example, Thailand, you may ask why we went to Thailand.

We just found a good company.

There is opportunity to advance our business in the Southeast Asia region and specifically, we think in the digital area where we have some good capability combined with our oral surgery program.

So I can talk about other countries as well, but those are the key areas that we're focused on today.

And see these are good markets growing and see good opportunity to take our products that we have, our know-how that we have and take advantage of markets that are healthy and growing.

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

Can you talk about the Henry Schein One product?

And you keep mentioning demand generation tools and being able to drive traffic to the dental offices.

I think you also mentioned there's $400 million of sales.

What exactly are those tools and how permeated is this solution into, like, your dental base?

Can it reach all of your dental clients now or not?

And sort of how do you expect that penetration to progress over time?

Sure.

So I'll give you a little bit of color.

One of the things that I would invite people.

We have had some people, some investors go out to our technology center in Salt Lake City.

And if people would like to get a demo of the technology and the software that drives this, we could set something up.

But quickly in summary, we have a number -- 2 or 3 products now with the creation of Henry Schein One that drive patient communications that are effectively smart communications to be able to go to patients and communicate with them and get them back into a dental office for treatment plans that have not been performed or to get them back in the office because they've been away for too long.

We believe that the average dental office might have close to a year's worth of billings for treatment plans that were diagnosed and patients have not returned.

We could also include in that, we have certain products through Henry Schein One that could help with either patient financing as well as some insurance programs that could help those patients if it's partly a financial issue to get those services performed.

So it's really detailed and smart patient communications to bring those customers or those patients back into the dental office.

We've seen success.

It's a service.

It's a monthly service that dental practices will buy monthly and effectively outsource their patient communications to us.

And it's been very effective.

We also have reporting that shows them the effectiveness of what we're doing.

And I would say that, if you ask any dental practice what their top 3 concerns are, patient traffic and demand is probably in those top 3. So this really addresses something very important to the dental practice and really addresses the value-add of Henry Schein.

That we're more than just, again, a rigid supplier of dental products from point A to point B. Yes, we do that better than anyone else and we're very efficient at that.

But we provide so many other services, this is just one of those.

So hopefully, that helps with a little bit of color.

Again, if anybody wants to get detailed demos of those products, we can try to set something up.

Maybe we could even do something remote where people can call into a webinar of sorts.

And across the general enterprise systems that we offer for small practices, midsized practices, large practices, the U.S. government, for example, military, the VA, these are all customized solutions that are very, very effective in managing the practice per se, but helping with clinical outcomes.

Okay.

And then just in terms of like traffic volume to the dental offices, do you think that the nature of the stock market and the S&P 500 has anything to do with that?

Like if people see the market pulling in late in the year, they're less inclined to have services performed, then they see the market come back and they see the value of their savings rising and they're more inclined to use sort of their savings to have services done.

Any correlation there in your mind or not?

What do you think?

There are so many discussions internally with our salespeople, with our customers.

Everybody has a view.

There are people that say that when Christmas and New Year fell this year had caused lost days of activity.

There are people that talk about the weather.

There are people that do talk about the impact of the stock market on the consumer and on the enthusiasm of the dentist to invest in the practice.

I think these things may all have short-term impact.

But I think in the end, we have to look at how the business performs over any year, 1, 2, 3 years.

And I think we are as well-positioned as we've ever been to continue to grow EPS.

I think the number of 7% to 9% is on the low end, specifically because 2019 is a transition year.

There's so much going on.

And I think we need to be a little cautious, including where is the world economy heading, where is foreign exchange going.

But I think once things settle down in 2020 going forward, I think the goals that we've set for ourselves of 9% to low single digit -- high single digits to low double digits, 9%, 11%, 12% is something that we're comfortable with.

I think we're investing in the right areas.

We have to turn the cash that we have into investment.

Whenever you invest, the first year is expensive because you have a lot of acquisition costs.

And in some types of businesses, you have to write down the inventory.

You have to take amortization charges.

So overall, if you take this into account, I think our three-pronged strategy is very, very exciting.

We have a great team in place in each one of our businesses ready to execute, ready to advance organic growth and of course, ready to deploy capital on an internal competitive basis because we will go to where the returns are the best.

We have time for one last question coming from the line of Steven Valiquette with Barclays.

So for me, really just 2 quick clarification questions here.

First, when you mentioned that for 2019 that the guidance assumes dental market trends will be in line with recent history, I just want to confirm whether or not you were referring to those softer trends in November or December, in particular.

Really what I'm getting at is, if we think about just 2019 overall versus 2018 overall dental market, are you assuming similar trend year-over-year or down year-over-year?

I just want to sort of just clarify your exact comment around that.

Sure.

So I would say it's a little bit down compared to full year 2018.

It does reflect the most recent history of a little softness in Q4 that continued into January.

Again, so hard to tell whether that's an anomaly or whether that's going to stick around for a couple, few quarters.

So we're trying to be a little conservative to assume that.

Okay.

Great.

Then the other one quickly.

You mentioned that the $1.1 billion dividend was used initially to pay down some debt.

I don't know how current that 8-K was from a few weeks ago, but could you give a number on how much debt you've paid down so far in calendar '19?

Yes.

We used the entire $1.1 billion to pay down, again, short-term debt that was floating rate debt.

It's not in the 8-K because the 8-K only covers 2018.

So the proceeds weren't received until early February of 2019.

So it's not in the 8-K.

But you basically have used all of it at this point in 1Q '19 to pay down debt?

Okay.

Great.

Yes.

Okay.

Good.

Thank you.

So I think we need to end the call because we committed to an hour and we've gone over an hour.

Sorry for the length of the initial introduction, but felt we had to put things into perspective.

Let me just close, and I really -- a lot of my closing remarks were included in the response to the second or the last question -- second to the last question.

We're very excited about the future of Henry Schein.

We're in the right spot.

Wellness and prevention is important in managing health care costs, managing the wellness of the world's population.

And so I think we are well-positioned, and I think our focus on the human side of wellness and prevention is going to pay off nicely for our investors long term.

We continue on our path of success.

It's been many years, both as a private company and this is our 24th year as a public company.

We have great teams.

We've got good discipline within the business.

And the medical and dental customers understand us.

Our brand is good.

We will continue to provide innovative solutions.

We do work on this.

We dream about this, think about it every day, every hour.

And the team is really focused on, as I said, promoting wellness and prevention and enabling our customers across the globe to focus on delivering quality clinical care while actually running a good business.

Steven and Carolynne are heading to Chicago this afternoon for the Midwinter Dental Trade Show, which is one of our biggest dental conventions in North America.

Unfortunately, I'm not joining them this year as I recently had back surgery.

It was most successful, but my doctor has advised me not to travel by plane for a month.

Rest assured, I'm going to be working very hard.

And I will be at the IDS.

There's a meeting in Chicago -- in Cologne next month.

So I'm in good shape health-wise, and you're in good hands with Steven and Carolynne.

Please feel free to visit our booth.

They'd be happy to also arrange for a tour of certain software systems and other interesting areas of the Henry Schein story.

Again, Steven and Carolynne are ready to answer any questions.

If you have further questions specifically, try Carolynne Borders who heads up Investor Relations at (631) 390-8105.

And of course, if you want to get Steven, too, he's available.

I look forward to reporting back to you our first quarter results back in May and very, very excited, as I said, about the future of Henry Schein.

Our team is enthusiastic.

We've got good plans.

And last year was a historical year.

We made significant movements, and the team is excited about continuing in the direction as we've described.

So thank you for your interest.

Thank you for participating.

You may now disconnect.