Henry Schein, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Henry Schein Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. 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.

[Carolynne Borders:]

Thank you and my thanks to each of you for joining us today to discuss Henry Schein's results for the third quarter of 2015. 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 differ from those expressed in or indicated by such forward-looking statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission. In addition, all comments about the markets we serve, including growth rates and market share, are based upon the company's internal analysis and estimates. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 4, 2015. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. I ask that during the Q&A portion, you limit yourself to a single question and a follow-up before returning to the queue. This will provide the opportunity for as many listeners as possible to ask a question within the one hour we have allotted. With that said, I would like to turn the call over to Stanley Bergman.

[Stanley M. Bergman:]

Thank you, Carolynne. Good morning, everyone, and thank you for joining us. We are so pleased with our third quarter financial results, which reflected accelerated growth in adjusted diluted EPS, as well as in worldwide sales despite the continued negative impact of the strength of the United States dollar. As was also the case during the first quarter, the first half, actually, of the year, the strength of the U.S. dollar impacted all of our international operations during the third quarter and particularly those in Europe. For the quarter, changes in currency exchange reduced our total sales growth by nearly 6% and reduced EPS by $0.06, both compared with the previous year – with last year. Yet, overall, the global markets we serve continue to be stable. Through our long-standing strategy of organic growth, complemented by strategic acquisitions, we believe we continued to gain market share on an overall basis during the quarter both in North America and internationally. Today, we are pleased to introduce guidance for the 2016 adjusted diluted EPS that represents growth of 10% to 12% compared with the midpoint of our new adjusted 2015 guidance range. In a moment, I'll provide some additional commentary on our recent financial performance and business accomplishments, but first, Steve Paladino will review our quarterly financial results. Steve.

[Steven Paladino:]

Okay. Thank you, Stan, and good morning. I am also pleased to report solid results for the third quarter of 2015. As we begin, I'd like to point out that our 2015 third quarter results include restructuring costs of $8.4 million pre-tax or $0.08 per diluted shares. Our most recent estimate of restructuring costs to be recorded in 2015 has been reduced to $30 million to $35 million pre-tax or approximately $0.26 to $ 0.30 per diluted share. This is a reduction from our original estimate of $35 million to $40 million pre-tax. And this reduced estimate is the result of certain restructuring actions being deferred to 2016. As such, we expect to continue to record restructuring costs through the first half of 2016. Our Q3 results also include a one-time income tax benefit, net of a non-controlling interest of $3.8 million or $0.05 per diluted share. And that's related to a favorable tax ruling that we received during the third quarter. I will be discussing our results as reported and also on a non-GAAP basis which will exclude both the restructuring costs and the impact of the tax benefit since we believe that the latter is more useful for comparative purposes. You can refer to exhibit B of this morning's earnings news release, and that reconciles our GAAP and non-GAAP income and EPS from continuing operations. Turning to our Q3 results, our net sales for the quarter ended September 26 of 2015, were $2.7 billion, reflecting a 2.4% increase compared with the third quarter of 2014. This consisted of an 8.3% growth in local currencies and a decline of 5.9% related to foreign currency exchange. In local currencies or constant currencies, our internal generated sales growth was 4.8%, and acquisition growth contributed an additional 3.5%. You can see the details of sales growth in exhibit A of today's earnings news release. Our operating margin for the quarter was 7.0% and expanded by 40 basis points compared to the third quarter of last year. However, on a non-GAAP basis, which would exclude the restructuring costs, our adjusted operating margin for the third quarter of 2015 improved by 71 basis points and was 7.4%. This expansion, which was very strong for the quarter, was a result of both higher gross margin as well as a reduction of operating expenses as a percentage of sales. If you look to our effective tax rate for the quarter, it was 29.6% on a non-GAAP basis. Again, we're excluding the one-time tax benefit and the restructuring costs to show the non-GAAP effective tax rate and that compares to 30.0% last year. Again, the lower tax rate is due to ongoing tax planning strategies as well as higher earnings in countries with lower corporate tax rate. We continue to expect that our non-GAAP effective tax rate will be in this 30% range for the remainder of the year, as well as going forward into next year. Our net income attributable to Henry Schein, Inc. for the third quarter of 2015 was $127.7 million or $1.52 per diluted share. This represented growth of 11.3% and 13.4%, respectively, compared to the prior year. However, again on a non-GAAP basis, net income attributable to Henry Schein was higher or $130.6 million or $1.55 per diluted share and that growth is 13.7% and 15.7% respectively, again compared to the prior year. I think it's important to reiterate that the foreign currency exchange impact was not only negative $0.06 for the quarter on our EPS, but it's approximately $0.20 for the first nine months of the year, and that's just converting foreign currencies into U.S. dollars at today's average rate versus last year's average rate. So, it has been a big headwind for us in the current year. Let me now turn to our sales results, and review some details there. Our dental sales for the third quarter of 2015 declined by 2.5% to $1.3 billion, but again, this is related to foreign currency. The 2.5% decline consisted of 4.6% growth in constant currency and 7.1% decline related to foreign currency. In local currencies, our internally generated sales was 4.1% and acquisition growth contributed another 0.5%. Of that 4.1% internal growth in constant currencies, it consisted of two components, 4.4% growth in North America and 3.6% growth internationally. Let's look at some additional detail on each of those figures. First, the North American internal growth of 4.4% consists of 3.8% growth in dental consumable merchandise sales and 6.4% growth in dental equipment sales and service revenue. Looking at the international business, the 3.6% constant currency internal growth included 2.9% growth in dental consumable merchandise and 5.3% growth in dental equipment sales revenue. So across the board on global dental, we showed solid sales growth both in consumables and equipment domestically and internationally. Turning to Animal Health sales, they were $732.5 million in the third quarter, down 3.4%, but the components there is 4.5% local currency growth and a decline related to foreign currency exchange of 7.9%. Internal sales growth in constant currencies grew 0.5%, and acquisitions contributed an additional 4.0% to growth. That 0.5% internal growth in constant currencies included a 1.9% decline in North America and 2.7% growth internationally. Again, as we've done for the first two quarters, we are normalizing our sales growth in international, and that 1.9% decline in internal sales in local currencies for North America actually reflects a 4.2% growth when you normalize both for the impact of product switching between agency and direct sales as well as excluding sales of diagnostic products both in the current period and in the prior period due to changes of veterinary diagnostic manufacturing relationships. Again, we believe that this normalized growth rate is more meaningful and a better reflection of the ongoing performance of our North American Animal Health business and will continue to show this normalized basis through the end of the year. Our Medical sales were $597.2 million for the third quarter, and that's an increase of 24.3%. It consists of 25.0% growth in local currencies and a small decline of 0.7% related to foreign currency exchange. Overall, internal sales growth in local currencies was 13.6% and acquisitions contributed an additional 11.4%. As I think most people know, the bulk of our Medical business is in North America, and that 13.6% internal growth was led by North America, which was 14.1% and that, again, was driven by large group practices and IDNs as well as a 1.3% growth internationally. This 14.1% growth in the North American Medical business was the highest level it's been in approximately eight years. If we look at a component of our Medical sales, sales of seasonal influenza vaccines was $68.9 million for the third quarter of 2015 and that's up just a little bit of favorable timing. It's up 12% over last year. We sold about 6.6 million doses of flu vaccine during the third quarter, and through yesterday, we sold a total of nearly 7.7 million doses. So we expect the sales for the whole year somewhere between 9 million and 10 million doses, and we're well on our way to achieving that. If you exclude the impact of flu vaccine sales in both periods, the overall Medical sales growth increased 26.2% and 27% in constant currency. Turning to Technology and Value-Added Services sales, they were $89.7 million in the quarter which is a 3.0% increase. This included 5.8% growth in constant currency and a 2.8% decline related to foreign currency exchange. In local currencies, the internally generated sales increased by 5.2% and acquisition growth contributed an additional 0.6%. That global 5.2% internal growth in constant currencies includes 4.5% growth in North America and 8.4% growth internationally. If we turn to stock repurchase, we continued to repurchase our common stock in the open market during the third quarter. Specifically, we purchased approximately 261,000 shares during the quarter at an average price of $144.11 which is just under $38 million of cash. This impact – the impact of this during the quarter was not material to our EPS. At the close of the quarter, we still have about $149 million authorized for future repurchases of our common stock, and we remain committed to our goal of buying between $200 million and $300 million of stock for the full year. If we take a brief look at some highlights from our balance sheet and cash flow, we had operating cash flow for the quarter of $107.4 million. That compares to $174 million last year. If you look at the details, the decrease was primarily driven by working capital and increases in accounts receivable and inventory, although we continue to believe we'll have strong operating cash flow for the year. The day sales outstanding was favorable, 40.6 days in the current quarter versus 41.2 days last year. And inventory turns was slightly down to 5.7 turns versus 6 turns last year. Finally, I'll just conclude with going through guidance for 2015 and 2016. I think it's important to remember that over the last two quarters, we noted on our past two conference calls that we expected to be at the low end of EPS guidance for the current year, primarily due to the impact of foreign exchange, and as I said, for the first nine months of 2015, foreign currency exchange translation had a negative impact again of approximately $0.20 on our EPS for the first nine months. So, because of that, we are now adjusting our EPS for the year to be in the range of $5.90 to $5.96, and that represents growth of 8% to 10% compared to the actual 2014 results. The 2015 guidance excludes restructuring costs which are expected to be between $0.26 and $0.30 per diluted share for the year, as well as the one-time $0.05 tax benefit that occurred in the third quarter. Also again, we now expect that these restructuring activities that were expected at the beginning of 2015 to be completed at the year will now – a portion of them will roll over into 2016. And we now expect restructuring costs in 2016 to be $0.03 to $0.07 per diluted share and should continue through the first half of 2016. As always, our 2015 EPS guidance is for continuing operations as well as any completed or previously announced acquisitions but does not include any impact for potential future acquisitions should they occur. Turning to 2016 financial guidance, we're pleased to report that we expect adjusted diluted EPS attributable to Henry Schein should be in the range of $6.55 to $6.65, and that represents growth of 10% to 12% compared to the midpoint of our 2015 adjusted guidance range. Again, the guidance for 2016 is for continuing operations as well as any completed or previously announced acquisitions but does not included the impact of any potential future acquisitions and also does not include the impact of the restructuring cost of, again, approximately $0.03 to $0.07. We also – our guidance assumes that foreign exchange rates remain relatively consistent with current levels. So with that, I'd like to now to turn the call back over to Stan.

[Stanley M. Bergman:]

Thank you, Steven. Let me begin my review of our four business groups with Dental group. In North America, we believe that consumable merchandise internal sales growth in local currencies was in the 3.8% range and indicates continued solid patient flow to dental offices. Equipment sales and service internal growth in local currencies was a solid 6.4% and was the highest in more than a year. I noted during our last quarter call that we expect the North American Dental sales and services growth to accelerate in the second half of the year, and these numbers bear that out. We saw particular strength during the quarter in sales of what we internally call traditional equipment. Within International Dental, consumable merchandise internal sales in local currencies grew at 2.9% during the third quarter. International equipment sales and service internal growth in local currencies was a solid 5.3%. And this follows double-digit gains in the preceding quarter which was bolstered by the IDS, the International Dental Show (19

[Operator:]

Your first question comes from the line of Robert Jones with Goldman Sachs.

[Robert Patrick Jones:]

Thanks for the questions, Stan and Steve. Really impressive internal growth in Medical this quarter. Anything worth calling out as far as the drivers of that over 14% internal growth? I mean, looking back several years, I'm not sure we've seen this level of growth on the internal North American side. I just wanted to, I guess within that, also make sure that all of Cardinal would be accounted for in the acquisition-related growth.

[Stanley M. Bergman:]

So, that's a very good question. And I think you've probably noticed that perhaps in the last five or six years, our Medical business has gained momentum. This has been the result of a strategic planning exercise we concluded about seven years ago, in which we determined that there were two areas we wanted to focus on. One is the larger practices in the networks and what has morphed into what many refer to as the IDNs, integrated delivery networks and at the same time, focusing on certain specialty areas that are important to our position. (30

[Steven Paladino:]

And, Bob, just the second part of your question, so clearly, we show all of the Cardinal sales that came over to the Schein platform, both sales that were processed through the Cardinal platform as well as the sales now being processed through the Henry Schein platform. All of that is shown as acquisition growth. So you could see there's also a significant acquisition growth in Medical and virtually – I think it's all related to the Cardinal acquisition of the physician business. So, we're able to track customer by customer and have a good split on that.

[Robert Patrick Jones:]

Okay. Yeah. No, both sides were actually really strong. Thanks for that. And I guess just to follow up, Steve, you mentioned that you're working through the restructuring initiatives. I guess just in that context, how should we think about the operating margin expansion next year relative to your goal of 20 basis points of same-store margin expansion per year?

[Steven Paladino:]

So, I think the goal is to at least achieve that 20 basis points. There's potential maybe to be a little bit ahead of that, depending on sales growth. And obviously the more sales growth that we get, if the markets continue to be solid for us, that allows us to leverage expenses to a greater extent. So, we feel good about the continued ability to expand margins into next year and even beyond.

[Robert Patrick Jones:]

Okay. Great. Thanks so much.

[Steven Paladino:]

Okay.

[Operator:]

Your next question comes from the line of Kevin Ellich with Piper Jaffray.

[Kevin K. Ellich:]

Good morning. Thanks for taking the questions. I guess, first off, I wanted to go to the Animal Health business. Steve, appreciated the comments on the normalizing for the agency direct sales switch. I guess how much did that affect the growth this quarter, and when do you think we'll see that come to an end?

[Steven Paladino:]

You're talking about just the agency because there's two components to normalization, Kevin. The first is the shift away from the IDEXX sales product line to Abaxis and Heska, and we take out both prior year the IDEXX sales as well as current year the Abaxis and Heska sales to really show, excluding all diagnostic product categories, what the growth is. That ends in Q4 of this year. Separately, the agency sales switch was a negative impact of just under 3% for us in the current quarter. It's hard to tell if there's future switches between agencies and direct sales. We really can't predict that, but – so it's not something I could say is going to end or not because there seems to be every year a flip-flop from one manufacturer, from one to the other. But we'll continue to call it out because I do think the best way of looking at our real growth is adjusting the impact of agency sales conversions for ourselves.

[Kevin K. Ellich:]

Sure. And then, Steve, can you provide any color as to what products or what type of products were switched to agency this quarter?

[Steven Paladino:]

It's in the pharma category, but I don't know the exact products, quite frankly, off the top of my head.

[Kevin K. Ellich:]

Okay. Then lastly, on the diagnostic switch to Abaxis and Heska, any color as to how that's going and which manufacturer seems to be getting more traction with the customers?

[Steven Paladino:]

Sure, I'll start and Stanley will jump in. So we continue to be very optimistic about the ability to drive sales for both product lines, Heska and Abaxis. And one thing – maybe I'll turn it to Stanley to talk a little bit about, we have launched the new software, Axis-Q, and maybe that's a good place, Stanley, for you to jump in.

[Stanley M. Bergman:]

Thank you, Steven. We are actually quite pleased with the progress we are making on our diagnostic portfolio offering, and in fact, training of our sales force to introduce these products. As you may recall, the switch from one manufacturer to this group of manufacturers came quite sudden. We will focus on a lot of other things at the time and reliance on that manufacturer. So about a year ago, we had to put our plans into place. Our plans contemplated adding software, middleware, that would connect various manufacturers' systems to our software, our practice management software. And about half the physicians in this country use our practice management software and a fair number overseas use our practice management software. So, we developed this middleware, Axis-Q which is pretty good. It's up and running, it's out of beta, and we're selling. Of course, our sales force needs to be trained and understand how the interface between the actual (36

[Kevin K. Ellich:]

Thanks, Stan.

[Operator:]

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

[Jon Block:]

Great. Thanks. And good morning, guys. Maybe the first one in – I hope I have the numbers right. Steven, for you, just when I look at the updated 2015 guidance, obviously, relative to our numbers, 3Q was a big bee (38

[Steven Paladino:]

Yeah. I don't want to get in to that level of specificity with specific margins for a quarter. But let me try to help you in a different way. So, there were a number of items, and I'll go to a couple of them, that were timing impacts, that were favorable timing in Q3, that reversed obviously in Q4. They include things like flu vaccines year-over-year. Flu vaccine sales were much stronger, up 12% Q3 this year versus last year. And as you know, flu vaccine is a good margin product for us. There's also timing of a number of expenses that we expected to hit and typically hit in Q3 that are now expected to hit in Q4. And if you add all those together, you may have $0.03, $0.04 or $0.05 of timing variances between Q3 and Q4. So while that reduces a little bit of the growth in Q3, obviously it has the opposite impact in Q4. And when you do that, I think you'll be able to understand really more of the flow of our second half of the year. So hopefully that's helpful.

[Jon Block:]

Okay. It certainly it was. And just one more question that may have two different parts. I guess the international dental results, Stanley, were very solid and it seems like consumables and equipment is both now moving in the right direction. Just on a high level, can you give us some commentary there? I know, you've had some ebbs and flows, but are you seeing the strengthening, I guess, broadening out in several countries? And how do feel just about the consistency going forward in international dental?

[Stanley M. Bergman:]

Yeah. I think the international dental business is solid. Of course, you have to adjust for foreign exchange because our results are post (40

[Jon Block:]

Okay. Great. Thank you, guys.

[Operator:]

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

[David M. Larsen:]

Hey. Congratulations on a good quarter. Can you provide me with a little bit more color around the growth in dental equipment sales in North America? It looked like a very healthy growth rate especially relative to last quarter.

[Steven Paladino:]

Yeah. It's something that – if you recall last quarter, we did say that we did expect to see an acceleration of equipment sales growth. So we're pleased that that happened. If you look at overall, just to give you a little bit of color, traditional equipment sales growth for the quarter was a bit stronger than high tech equipment but not much, probably somewhere in total of about 1 percentage point differential. So really good growth both on the overall high tech equipment category as well as the overall traditional equipment category, so not major variance but slightly better traditional equipment growth than high tech growth.

[David M. Larsen:]

Okay. And then, just a quick follow-up on IDEXX Labs, was that – how much of a headwind was that in 2015 in terms of revenue and have you sort of fully worked through that and filled that bucket? Thanks.

[Steven Paladino:]

Yes. So, the IDEXX revenue in the prior year for 2014 was about $150 million of revenue. And we said we would not be back even on revenues in year one it would probably be at least a couple of years maybe into the third year for us to be even. It is a longer sales cycle to convert people. Not all veterinarians are eligible for conversion in the same year because of long-term commitments. So, it is a multi-year project. So, we're still negative on overall diagnostic sales. But again, long term, we feel, as Stanley talked about it in the previous question, optimistic about being successful in that category.

[David M. Larsen:]

Okay. So, I mean, if you did $150 million in revenue in 2014, did that convert to, like, say, $50 million in 2015 and then will increase to, like, $100 million in 2016?

[Steven Paladino:]

Yeah. I don't want to make those type of projections at this time as to how much it is. I think it's too much specificity. We typically don't give that level of detail on a specific product line. But it's going to take two or three years really to get back to even on the sales line. By the way, on the profit line, depending on how things work, we may not need the same amount of sales to achieve the same level of profitability because there may be higher margin.

[David M. Larsen:]

Okay. Great. Congrats on a good quarter.

[Steven Paladino:]

Thank you.

[Stanley M. Bergman:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Cherny with Evercore ISI.

[Michael Aaron Cherny:]

Good morning, guys, and thanks for all the details so far. I just wanted to dive back in a little bit, to one of the earlier questions – I believe it was from Bob – on the Medical business. Stanley, you did a great job talking about the strategic plan you had put in place in terms of repositioning your sales structure. That being said, the last five quarters, if my math is correctly on local currency, internally generated revenue has really started to see the inflection point. Is there anything else you can point to – is some of this related to ACH-driven utilization? Obviously, you talked about Cardinal and to the benefits there. (45

[Stanley M. Bergman:]

Yeah. It's a very good question, and obviously, there's no solid data out there. There are a couple of factors. First of all, there is definitely a movement from the acute care setting to the alternate care setting, both in terms of physician practices, and I'm talking about GPs, although in some areas, the specialists, too, and the ambulatory care centers. So that's a fact, specific data, hard to get, but I think it's fair to say. I think as the Affordable Care Act kicks in, there'll be more people covered with the ability to go to a GP for a check-up or when they're feeling a flu or something rather than wait until they're really sick to go to the emergency center at a hospital where people who do not have insurance would have been treated. I'm not dealing with the very low-end, which is Medicaid nor with the Medicare or those that are covered by insurance. But there're still, I don't know, 50 million, 60 million, 70 million people that in one way or another now will have some form of insurance, not fully kicked in, but GPs in general are seeing more patients. They're not getting reimbursed by the way at the same rate per patient that they were before. But they need a glove and they need a mask, and they need cleansing solutions. I would also add that there are not that many national distributors that can provide a complete solution to the alternate care setting. I happen to think we do it better than anyone else, but I'm sure others will say they do it well. So, we all gain name recognition with the GPOs. And the GPOs realize that if the contract is put through Schein, they're not going to look too bad because we're going to execute well. And I think we execute extremely well to these large accounts, multiple locations under common management. So, it's a little bit of trend and it's a lot of execution. And I think we have good momentum in this marketplace. A lot of brand recognition that perhaps we didn't have six or seven years ago amongst these large providers because six or seven years ago, we were known to the doctors, the person that managed the practice rather than to the large group practice or the hospital or the IDN that is now our customer.

[Michael Aaron Cherny:]

Thanks, Stanley. And then just, Steve, one quick technical question for you. The euro has been all over the place over the last year. Obviously, you talked about the headwinds you had related to EPS over the course of the year. I believe you said, currency was roughly in line, at least the expectation for next year, call it, $1.10 or so. Do you pursue any hedging? Is there any thoughts, given the volatility over the last 12 months, 18 months, to do any hedging on the euro?

[Steven Paladino:]

We actually took another look at it, given the volatility, and we continue to elect not to hedge translation adjustments. Really, it's not an economic hedge. Really, if you want to hedge for a long-term period is expensive and you're just delaying the impact until when the hedge runs out. We do hedge though transaction exposure. So, in countries where we're buying in currency A and selling in currency B, we're continuing to hedge. We actually increased the amount of hedges we do on transactions. We were typically hedging 70% plus of known activity. We're probably closer to 90% today. But we really feel that the translation exposure is something that we don't want to do. And quite frankly, I think that the volatility and being able to predict movements is difficult, if not impossible.

[Michael Aaron Cherny:]

Understood. If I could sneak in one last question, I apologize for this. Is there an extra week next year included in the guidance?

[Steven Paladino:]

Yeah. So, it's a good point. Yes, we have our 53rd week in 2016. I'm glad you asked the question. So, it's interesting because depending on the business unit, the level of incremental profitability in some cases is modest, in some cases is actually slightly negative. And that may sound odd, right, because you may say, how do you have an extra week and not have more profitability? But if you think it through, it's the last week of the year which is the holiday week. So, when you look at sales on Consumables, sales tend be very light that week because a lot of offices are closed and there's not a lot of ordering going on that week. Equipment is a little different story. But at least on Consumables, it's a very light week. And a lot of expenses, and if you think of payroll and payroll-related that represents at least two-thirds of our expense structure, you have a full week's worth of payroll and a partial week's worth of sales. So, everyone thinks the extra week is very profitable for us. It really is marginally plus or minus depending on the business unit.

[Michael Aaron Cherny:]

No, that's perfect, and thanks for the color. I really appreciate it.

[Steven Paladino:]

Okay.

[Operator:]

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

[John C. Kreger:]

Hi. Thanks very much. Can you (51

[Steven Paladino:]

John, sorry to interrupt you, but you – the beginning of your question was not – we weren't able to hear, so maybe you could just repeat it again.

[John C. Kreger:]

Sure. Sorry about that. If you think about your U.S. dental consumable growth rate of 3.8%, just hoping you could elaborate a little bit on any trends you might be seeing underneath that, for example, growth in the sort of specialty procedures like implants versus the more GP-oriented procedures. And related to that, are you starting to see any increasing shift of some of the more specialty procedures into the general dentist office or not really?

[Stanley M. Bergman:]

Well, John, I don't think this quarter would be an indication of trends per se. Having said that, I do believe that more procedures are moving into the GP office, and that's why, by the way, we entered the endodontic space, the orthodontic space and the implant oral surgery space in such a heavy way several years ago because our GP customers are performing these procedures. So, I think that is correct. I don't think any particular results that we may have may be indicative of the change. If we're growing faster in the specialty area, the reason is probably because we're underpenetrated. So, I would say in our numbers, there's nothing that can indicate one way or the other, although, obviously, there's a movement from the small accounts to the midsized accounts and from the midsized accounts to the elite, the large ones although we are experiencing I think the heaviest growth in the midmarket accounts, those are practitioners that own a multiple of practices, three, four practices. Yeah. And just on the pure metrics for the current quarter, our overall specialty product category did grow a little bit faster than the overall 3.8%, John. So that's part of our strategy and why we got into those product categories because we do expect them to grow at a faster clip. It wasn't a huge gap this quarter but again this is only one quarter and it was slightly faster.

[John C. Kreger:]

Great. Thanks. And just one last one, Steve. Did the price component of the 3.8% change at all versus what you've seen in earlier quarters?

[Steven Paladino:]

No. I would say that pricing inflation for the year has been very stable. I don't think there's been any major movements.

[John C. Kreger:]

Great. Thank you.

[Steven Paladino:]

Okay.

[Operator:]

And we have time for one final question and your last question comes from the line of Jeff Johnson with Robert Baird.

[Jeff D. Johnson:]

Thank you. Good morning, guys. Steve, I want to go back to one of your comments just on the dental equipment side. You talked about the strength in basic equipment. On the technology side, that side has been a little weaker this year. I know you've had some tough comps throughout the year from last year with PlanScan and what have you. But can you talk about maybe in the context of those tough comps, end markets, maybe some of the innovation where your suppliers are, maybe on Intraoral and that probably a little bit behind there? But just kind of what is it going to take to get some of the technology side of the equipment business on the dental side growing here again?

[Steven Paladino:]

Well, you know, Jeff, mid-single-digit growth on technology is not a bad place for the current quarter. We are seeing on CAD/CAM a bigger increase in people electing at this time to just buy the scan-only product and not the full system. I'm sure you know we sell a few different brands on scan-only and sometimes that makes sense. I think that's ultimately the practice, I think we'll go for the full end-to-end solution. But sometimes, they just want to get started. And so, we're seeing a lot more people doing scan-only than we've seen historically. We did have a difficult comp with upgrades and very strong sales last year in the CAD/CAM segment. But I still think if you look out a few quarters, this is going to be a very strong category. There's still very good technology. There's still very low penetration in the market. It's something that dentists really will adopt over a period of time. And again, we all know dentists are a little slower adopters of technology than other practitioners may be. But I think we should stay very bullish on this category.

[Jeff D. Johnson:]

All right. That's helpful.

[Stanley M. Bergman:]

I would add, Jeff, that the rates of automation in the dental laboratories is accelerating a lot. And as the largest provider of products to dental labs, we're experiencing good growth in those three large business segments (56

[Jeff D. Johnson:]

Understood. Thanks. And then, just maybe two very quick clarifying questions. Steve, repurchases in the quarter down under $40 million, second quarter in a row, you've been kind of trending in the mid-70s for a number of quarters, just why especially with the stock having pulled in in I guess during the quarter, why the repurchases may be lower two quarters in a row, and then any comments at all on timing of the dental consumables business throughout 3Q. One of your suppliers talked about maybe entering the quarter a little stronger than they exited, but just anything you were seeing from a timing standpoint would be helpful. Thank you.

[Steven Paladino:]

Sure. Yeah. In hindsight, I wish we were a little bit more aggressive in Q2 and Q3 in stock repurchase, but we'll still probably – will use the bulk of the $150 million that is approved before the year-end or slightly into next year. I'm not sure if there's any better answer to that, Jeff. On Q3 on the dental side, I think I would concur that the quarter, but don't be too much into this. The quarter was stronger at the beginning of the quarter than the end of the quarter, but many, many times, you see those variations and they really are just the ebbs and flow of purchasing patterns of practices and of the timing things and they're not indicative of really any trend, but I do agree that it started stronger for Q3 than the final month of the quarter.

[Jeff D. Johnson:]

I appreciate it. Thank you.

[Stanley M. Bergman:]

Thank you, everybody, for calling in. I'm very pleased with the progress of the business. In each of our businesses we're gaining market share, we are executing on our strategies and are very excited about the future of the business. Thank you for calling in. If you have any questions, please feel free to reach out to Carolynne Borders at 631-390-8105 or Steve Paladino at 631-843-5915, and look forward to speaking with you I think, in four months, right?

[Steven Paladino:]

A little bit longer for the year-end, yes.

[Stanley M. Bergman:]

Thank you very much and have a good holiday too everyone. Thank you.

[Operator:]

This does conclude Henry Schein's third quarter conference call. You may now all disconnect.