Henry Schein Inc (HSIC) — Q4 2017 Earnings Call Transcript

Thank you, Shama, and thanks to each of you for joining us to discuss Henry Schein's results for the 2017 fourth quarter and full year. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during the call will include information that is forward-looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward-looking statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission. In addition, all comments about the markets we serve, including end market growth rates and market share are based upon the company's internal analysis and estimate. The contents of this conference call contain time-sensitive information that is accurate only as of the date of the live broadcast, February 20, 2018. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Please limit yourself to a single question and a follow up during Q&A to allow as many listeners as possible to ask a question within the one hour that we have allotted for the call. With that said, I would like to turn the call over to Stanley Bergman.

Good morning and thank you, Carolynne. Thank you everyone for joining us. Now let me start with a review of our financial results at a high level. We closed out 2017 with a strong fourth quarter that demonstrates the advantage of our Henry Schein high-touch, value-added solutions business model. Our customers rely on our team of trusted advisors for the clinical, supply chain, technology and business solutions that practitioners and their office personnel need to operate their practices efficiently day in and day out. We satisfy practice needs through technology as well as our consultative high touch selling approach. So our customers can focus on patient care. It is really important to understand that we are in fact providing a high-touch relationship with our customers that has sustained our growth for well over a quarter century, since we added the field component to our sales and marketing programs. Before I begin to go into further information on the quarter and on the company, I’d like to note that in recognition of our team members following the recent US Tax Cuts and Jobs Act, Henry Schein plans to distribute up to $1,000 one-time cash bonus to certain designated staff members in the US with one full year of service as of January 1, 2018. We are pleased to be able to give back to certain Team Schein members in the US with the special bonus in recognition of the hard work and commitment to excellence. This incremental investment in our team is a reflection of the motivation spirit and value that our broader team across the globe delivers to our customers every single day. Steven, of course, will provide more details on the financial impact of this bonus. So our competitive position in the marketplace builds upon four key elements: mainly education, service and support; software and innovation; and strong long-term customer relations. Just to highlight, we feel 4,200 highly trained field sales consultants and 2,200 telesales representatives across the globe, these Team Schein members are helping our customers operate a more efficient practice so that customers can focus on clinical outcomes. In the field today, we have 200 equipment sales and service centers around the world, with more than 2,000 dedicated field technicians to service and maintain equipment. They are supported by 1,000 customer service representatives. It's an enormous amount of high-touch that goes on each day between us and our million practices that we service, million and a half practitioners in those practices. And, of course, software and innovation is critical in advancing the practice goal of efficiency and clinical outcomes we service that day in and day out through our 350 software developers and 800 technicians on the telephones and in the field that support our customers. As a company, Henry Schein is a healthcare solutions network powered by people and technology. That network is comprised of more than 3,000 suppliers, some 22,000 Team Schein members and more than 400 key opinion leaders in 85 years of knowledge and expertise and solutions. This can provide the connectivity to our customers. We are armed with a strong value proposition. We are optimistic about our long-term growth opportunity and believe we are well positioned in attractive growth markets. And we believe in our high-touch value-added business model, which we believe will stand the test of time. It will be in the results, we are quite sure of that. We have successfully executed on our strategic plan for 2015 to 2017. And now are embarking on our 2018 to 2020 strategic plan, which we will discuss in great detail later. This team is committed to determining our thinking, our strategy in advance and has a phenomenal track record on execution. But first I'll provide some additional commentary on our recent performance and accomplishments, and Steven will review our financial results a little bit now actually and I'll provide comments later.

Okay. Thank you, Stanley, and good morning to all. As we begin I'd like to point out that I'll be reviewing our results on a GAAP basis, a reported GAAP basis and also a non-GAAP basis. Each reporting period has items that affect non-GAAP results and they are as follows. For Q4 2017, our non-GAAP results exclude a one-time tax charge of $143 million, or $0.92 per diluted share. And this is related to an estimate of the transitional tax on deemed repatriated foreign earnings, as well as the revaluation of deferred income taxes, both that have associated with US tax reform legislation. In addition, we have a loss of $17.6 million pretax, or $0.11 per diluted share and that loss is associated with the previously announced divesture of our equity ownership in E4D Technologies. On a full year 2017 non-GAAP basis, results exclude the same items as well as the litigation settlement expense of $5.3 million pretax or $0.02 per diluted share in the second quarter. For last year, our Q4 2016 non-GAAP results exclude restructuring costs of $16.1 million pretax, or $0.08 per diluted share, and on a full year basis our non-GAAP results exclude restructuring costs of $45.9 million pretax or $0.21 per diluted share. We believe that these non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business; they enable the comparison of financial results between periods where certain items may vary independent of business performance and allow for greater transparency with respect to key metrics used by management in operating of the business. These non-GAAP financial measures are presented solely for information and comparative purposes and should not be regarded as replacements for the corresponding GAAP measures and you could see a detailed reconciliation of these items in Exhibit B in this morning's earnings release as well as on the Investor Relations section of our website. Let me also point out that the fourth quarter of 2016 included one additional selling week when compared to the fourth quarter of 2017. This week is the holiday week between Christmas and New Year. We report on the 52/53 week basis with the fiscal year ending on the last Saturday of December each year. Last year, we previously discussed this impact as it related to our 2016 versus 2015 results on the Q4 call. And the next time that the extra week occurs for us will be in 2022. So because of that, we have estimated the impact of the extra week on sales and in order to provide more meaningful analysis I'll be reviewing internal sales growth in local currencies adjusting for the extra week in the fourth quarter of last year. So turning to our results. Net sales for the quarter ended December 30, 2017, were $3.3 billion, reflecting a 6.3% increase compared with the fourth quarter of 2016. The components of our internal sales growth in local currencies of 5.1%, acquisition growth of 4.0%, an increase related to foreign currency exchange of 2.4% and the extra week negatively impacted our sales growth by 5.2%. Again you can see the details of our sales growth in Exhibit A of the earnings news release. Operating margin for the fourth quarter of 2017 was 7.27% and expanded by 41 basis points compared with the fourth quarter. But it's important to look at some additional details on our operating margin related to the Q4. The first relates to restructuring costs in the fourth quarter of last year. These restructuring costs in the prior year basically impacted our operating margin comparisons by 51 basis points. Second, acquisitions completed during the past 12 months and related expenses for those acquisitions, as well as the impact of certain sales switching between agency sale and direct sales, combined to negatively impact operating margin comparisons by 30 basis points. Excluding the net impact of these items, our operating margin expanded by approximately 20 basis points in the fourth quarter on a year-over-year basis. For the full year 2017, excluding the impact of the same factors, as well as the litigation settlement expense in Q2 that favorably impacted our operating margin by 23 basis points, our full year operating margin was approximately flat compared to 2016. I'd also like to note that we reported low year-over-year expenses as a percentage of sales as we continue to realize operating efficiencies from previous restructuring efforts and remain focused on leveraging our infrastructure and tightly controlling expenses. As we look forward to new opportunities to streamline our businesses and reduce costs. We are currently assessing additional restructuring possibilities in 2018. If you look at our reported GAAP effective tax rate for the fourth quarter, it was 90% and that includes the one-time tax charge of $143 million as I just mentioned. But on a non-GAAP basis excluding this one-time item as well as the loss associated with the divestiture of E4D Technologies, our effective tax rate was 27.7%, and this compares to 28.2% in the fourth quarter of 2016 which is also on a non-GAAP basis. Full year GAAP effective tax rate was 44% and that compares to 28.8% last year. But again, on a non-GAAP basis the full year 2017 effective tax rate was 26.8% versus 28.6% in 2016. So we believe our tax rate will decline by somewhere between 300 and 400 basis points in 2018 and will be somewhere in the 24% range for 2018. This reduction in the effective tax rate is reflected in the updated guidance that we have provided today. Moving on to the net loss attributable to Henry Schein for the fourth quarter of 2017 was $8.5 million, or $0.06 per diluted share on a GAAP basis. But if you look at the fourth quarter on a non-GAAP basis excluding those one-time items in the restructuring cost, net income attributable to Henry Schein was $152.1 million, or $0.97 per diluted share. This represents growth of 0.5% and 3.2% respectively compared with the non-GAAP results for the fourth quarter of last year. I'd like to provide a little bit of additional color on our results. Amortization expense from acquired intangible assets related to M&A activity was $28.3 million, pretax was $0.13 per diluted share for Q4, 2017. And for the full year, the amortization from acquired intangible assets was $112.4 million pretax or $0.52 per diluted share. Also, I would note that foreign currency exchange had a positive impact on EPS for the quarter of approximately $0.02. So I'd like to provide some detail on our sales results for the fourth quarter. As a reminder, the sale growth figures will exclude the impact of the extra week in the prior year and I'll quantify this impact as we go as applicable. So starting with Dental sales, for the fourth quarter of 2017, they increased by 8.2% to $1.7 billion. This consists of internal growth in local currencies of 4.6%, acquisition growth of 6%, and increase related to foreign exchange of 3%; and then the extra week in the prior year negatively impacted sales growth by approximately 5.1%. North American internal sales growth in local currencies was 6.7% which included 1.9% growth in sales of dental consumable merchandise. Remember that growth in consumable products was negatively impacted by approximately 130 basis points due to loss of a previously disclosed ASO contract. And I think it's also important to note that this contract has now anniversaried, so this is the last quarter it will have an impact on our growth rate. Our North American Dental Equipment sales and services were very strong at 18.1% growth in local currencies. And our fourth quarter equipment backlog continued to remain very healthy. International Dental internal growth in local currencies was 0.1%; it included a 2.6% decrease in sales of dental consumable merchandise due primarily to low sales in certain European countries but strong growth in dental equipment sales and services revenue at 7.7%. Our Animal Health sales were $889.8 million for the fourth quarter which was an increase of 6.2%. This consisted of internal growth in local currencies of 4.5%, acquisition growth of 3.7%; and increase related to foreign exchange of 3.2% and again the extra week negatively impacted sales growth by 5.2%. The 4.5% internal growth in local currencies included 6.0% growth in North America and 2.9% growth internationally. Approximately 70 basis points of the sales growth in North America was from certain products switching between agency and direct sales; excluding this impact, normalized sales growth for North America was approximately 5.3%. We believe the solid sales growth for the quarter reflects both the healthy end market, as well as our commitment to offering a wide range of product and value-added services. Our Medical sales were $636.9 million for the quarter, an increase of 2.6%. Internally generated sales in local currencies were up 8.3%, acquisitions contributed 0.1%; there was a 0.3% increase due to foreign exchange and the extra week negatively impacted sales growth by 6.1%. That 8.3% internal growth in local currencies included 8.7% growth in North America and a decline of 2.9% internationally. We are pleased with our Medical growth which has been primarily driven by strong organic growth from existing large customers. Technology and Value-Added Service sales were $114.6 million in the quarter, an increase of 2.1%. Internally generated sales in local currencies were up 3.2%, acquisitions contributed 0.6%; there was a 1.1% increase due to foreign exchange, and again the extra week negatively impacted our sales growth by about 2.8%. The 3.2% internal growth in local currencies included 1.8% growth in North America and 11.4% growth internationally. The North American growth of 1.8% reflects the lower dental software sales and electronic services revenue versus the prior quarter and was partially mitigated by strong 12% growth in our financial services revenue segment. The international market sales growth of 11.4% was highlighted by strong dental and veterinary software revenue. We continue to repurchase common stock in the open market during the fourth quarter, most specifically during Q4, we spent approximately $225 million to repurchase approximately 3.2 million shares. We elected to accelerate our share repurchases during the fourth quarter to take advantage of what we considered to be an attractive buying opportunity. The impact of this repurchase on our fourth quarter diluted EPS was about one half of one cent per share. For the full year, we spent approximately $450 million for the purchase of approximately 5.9 million shares. And at the close of the fourth quarter, we had approximately $200 million authorized for future repurchases of common stock. If we look at some of the highlights of our balance sheet and cash flow. Operating cash flow for the quarter was $238 million, compared to $264.5 million last year. For the year now, operating cash flow was $545.5 million versus $642.6 million in 2016. And the low operating cash flow is primarily due to higher working capital. Our capital expenditures for the year were $81.5 million resulting in free cash flow of $464 million. If we look at accounts receivables day sales outstanding, they were 41.5 days for the fourth quarter which is virtually unchanged from the 41.3 days last year. Full year basis, they were also consistent at 41.2 days versus 41.3 days last year. Inventory turns for the fourth quarter of 2017 were 5.3 turns and that compares to 5.5 turns last year. On a full year basis, also similar 5.3 turns in the current year compared to 5.5 turns last year. So I'd like to conclude my remarks by noting that we are raising our 2018 financial guidance to reflect the impact of the US tax reform legislation. For 2018, we now expect diluted EPS attributable to Henry Schein to be $4.03 to $4.14 per share. This is up from the previous guidance of $3.85 to $3.96 and reflects growth of 57% to 61% compared with our 2017 GAAP diluted EPS of $2.57. This includes the impact of the one-time cash bonus that Stan mentioned earlier. These distributions will total approximately $4 million and will be negative in the first quarter of 2018. The anticipated impact to our EPS is approximately $0.02 per share. When compared to 2017 non-GAAP diluted EPS of $3.60, for 2018 EPS growth is expected to be in the range of 12% to 15% growth. So since the tax benefits from stock based compensation or ASU 2016-09 is expected to be less for us in Q1 2018 as compared to the prior year, we anticipate Q1 2018 EPS growth to be in the mid-single digit range on both the GAAP and non-GAAP basis. It's important to note that this is before the $0.02 impact of the one-time cash bonus that we just discussed. This guidance assumes end market to remain stable and is consistent with current market conditions. It's also guidance for continuing operations, as well as any completed or previously announced acquisitions, but that does not include any impact for potential future acquisition should they occur. And this guidance also assumes foreign exchange rates are consistent with current levels. Last comment I'll make is that we believe there will be no material impact to our 2018 financial results due to the adoption of the new revenue standard ASU 2014-09 which is revenue from contracts with customers. So with that I'll now turn the call back over to Stan.

Thank you, Steven. Before we continue, I would like to discuss the February 12 press release from the US Federal Trade Commission that claims Henry Schein and other distributors violated US antitrust law by allegedly colluding to refuse discounts to and otherwise serve buying groups that represent dental practitioners. We believe these allegations are completely unfounded and we plan to defend ourselves vigorously. It's also important to point out that the complaint seeks injunctive relief and not monetary damages. We do not expect this issue to materially affect our financial condition or operational results. I want to stress that despite the provocative nature of the allegations, the case centers on whether we conspired not to sell to dental buying groups. According to the FTC's initial definition, we conduct business with over 100 of these organizations. Even under a narrower definition proposed by the FTC, we continue to engage with the very groups we are accused of refusing to serve. This logic does not hold. Henry Schein has a longstanding track record of serving customers with integrity and has earned a reputation for ethical business practices. This is why we have been named on Fortune's list of the World's Most Admired Companies for 17 consecutive years since our initial appearance on the Fortune 500 list, and why we have been recognized annually by Ethisphere as one of the World's Most Ethical Companies since 2012. We are genuinely troubled by these allegations and firmly believe the entire complaint lacks merit. Now, I will present some financial highlights from 2017 as previously mentioned. We achieved net sales of $12.5 billion in 2017, an increase of 7.7% from the prior year. Internal sales in local currencies rose by 5.1% in 2017, excluding the influence of an extra week in 2016, which aligns with our objective of growing 1% to 2% faster than the end market. GAAP diluted EPS, however, declined by 17.1% compared to 2016 GAAP results, primarily due to charges related to repatriating foreign earnings and a revaluation of deferred taxes. In contrast, non-GAAP diluted EPS grew by 8.8% versus 2016 non-GAAP results. Throughout 2017, we allocated approximately $450 million to repurchase 5.9 million shares of our common stock, reflecting our confidence in our business strength and our commitment to delivering shareholder value. Additionally, we completed 14 strategic acquisitions in 2017 to expand our geographic reach and enhance our product offerings. These acquisitions had trailing 12-month revenue of about $0.25 billion at the time of purchase, specifically enhancing our digital dentistry solutions and broadening our product range in endodontics and surgical items. In Animal Health, we acquired a cloud-based practice management solution and announced our new presence in Brazil, among other strategic initiatives to strengthen our expertise and market access. We also supported customers impacted by hurricanes, tornadoes, and wildfires while providing dental and medical services to underserved populations worldwide. In summary, we believe 2017 was an exceptional year for Henry Schein. Now, let me review the quarterly performance of our four business groups, starting with Dental. In North America, internal sales growth of dental consumable merchandise, in local currencies, was 1.9% in the fourth quarter, which rises to 3.2% when excluding the impact of the previously disclosed DSO contract loss. Without this contract, growth has accelerated over the past three quarters. Looking ahead, we are optimistic that a stronger macroeconomic environment will lead to improved growth in the North American dental market. Moreover, North American Dental Equipment internal sales growth in local currencies was an impressive 18.1%, marking a multi-year high. We are pleased with the robust sales growth in equipment, partly driven by solid contributions from the Dentsply Sirona dental equipment line. However, I must emphasize that our strong performance also included key dental equipment manufacturers such as A-dec, Midmark, and 3Shape. Overall, our dental equipment business is thriving, reflecting the strong market commitment from dentists to invest, characterized by across-the-board growth across all the manufacturers we represent. With the relationship with Enterprise in North America now established, we are optimistic about continuing to advance our commitment to educating practices on the benefits of digital dental technology, enhancing both patient diagnosis and treatment effectiveness, as well as productivity in dental offices. The ongoing digital transformation in dentistry is exciting, and we are well positioned to drive its adoption in practices throughout North America and globally. As noted by Steven, International Dental Consumable Merchandise internal sales declined by 2.6% in local currencies due to lower sales in certain European markets. Conversely, International Dental Equipment internal sales rose by 7.7% in local currencies, achieving the highest quarterly growth in over two years. This follows a strong quarter at IDS in the second and third quarters. Thus, we have maintained growth in our international equipment business across Europe and beyond. You may recall that in 2013, we strengthened our position in the dental specialty market with a 60% stake in BioHorizons, a manufacturer of advanced dental implants sold worldwide. Their revenue grew from $115 million in 2013 to about $176 million in 2017. Recently, we acquired the remaining interest in BioHorizons, obtaining 100% ownership. Together with our investment in CAMLOG Biotechnologies, a leading manufacturer of implants in Europe, Henry Schein has established a significant presence in two of the largest implant markets: the US and Germany. We are also increasing our footprint in other global regions. The transition to digital dentistry is crucial in implant dentistry, and we are very satisfied with our investment in this sector, as well as our expanded presence in the oral surgery segment through our acquisition of Southern Anesthesia, which has enhanced our ability to serve oral surgical practitioners with a wide range of products and value-added services, including bone regeneration materials for high-quality patient care. We anticipate rising demand for implants and related materials as digital processes are adopted, further enhancing the patient experience. We are well positioned to leverage this trend with our comprehensive dental specialties offering. More details will follow as we address questions later. Turning to Animal Health, global internal sales growth in local currencies was 4.5% in the quarter, a reflection of our strong execution both domestically and internationally. We believe the global market is healthy, and we continue to deliver innovative products and solutions while maintaining strong customer relationships. At the recent VMX Conference in Orlando, we announced a significant enhancement to our Axis-Q platform called Axis-Q LENS, which improves our capability to provide veterinary practices with historical trending analysis for both reference labs and point-of-care testing. This feature allows easy identification of variations in lab results and enhances overall care. Axis-Q LENS is unique in that it presents trended results from multiple reference labs, providing comprehensive insights integrated with our practice management software. Notably, we estimate that over 55% of animal health practitioners in the US utilize our technology. Shortly after concluding the fourth quarter, we acquired a 60% stake in ABASE, a distributor of veterinary healthcare products in Sao Paulo, Brazil. ABASE specializes in pharmaceuticals, pet food, diagnostic equipment, and consumables primarily serving companion animals, swine, poultry, and bovine segments, generating approximately $27 million in revenue for 2017. This investment bolsters our footprint in the Brazilian market and diversifies our supplier relationships, effectively doubling our volume in the region. Now, for the Medical Group, we saw low internal growth in local currencies of about 8.3% in the fourth quarter. We believe our medical sales growth exceeded the broader office-based practitioner market due to our successful penetration into larger group practices, leveraging our strong supply chain management capabilities. As we adapt to the evolving healthcare landscape in the US, we advocate for a system that seeks to expand access to care, stabilize the insurance market, and promote wellness and prevention, all essential for reducing healthcare costs. We focus on helping physicians navigate these changes while delivering metrics that improve quality and reduce transaction costs in the non-acute supply chain segment. Our healthcare services infrastructure is well-equipped to support this customer base. To summarize our Technology and Value-Added Services, internal sales growth in North America was 1.8% in local currency, influenced by lower dental software sales and electronic services revenue, partially offset by strong financial services revenue. We recognize that our sales resources were focused on launching the Dentsply Sirona business in the fourth quarter, which diverted attention from software sales in North America. Despite this, we see significant potential in this segment as we continue to acquire accounts of varying sizes and enhance our position in the software technology field. We experienced slight negative sales growth in the fourth quarter due to transitions between agency and direct sales. In the third quarter of 2017, we redirected a portion of our technology sales team to prepare for the Dentsply Sirona product launch, and we expect our software sales to demonstrate improved growth year-over-year in 2018 as we introduce Dentsply Sirona products in the US. Internationally, we achieved notable double-digit growth in local currencies of 11.4%, with particularly strong performance in dental and animal health software revenues. In December, we announced the acquisition of eVetPractice, a leading provider of cloud-based practice management solutions for veterinary clinics. With eVetPractice, we are well positioned to offer customers state-of-the-art, value-added services and technology solutions as part of our integrated technology platform, which includes Abby Mark Impermade in North America, as well as Vision, RX Works, and Robovic internationally. eVetPractice nicely complements these offerings for customers interested in cloud solutions. We now have a robust suite of cloud solutions available in both dental and animal health domains. We remain very optimistic about our practice solutions business and recognize the significant opportunities to enhance our platform during the 2018 to 2020 strategic planning period. This segment is incredibly exciting for us, and we are well positioned to help customers operate more efficiently and deliver superior clinical care. Before I open up the call for questions, I would like to share a few thoughts regarding our strategic plan for 2018 to 2020. We are proud to be recognized by The Ethisphere Institute as one of the 2018 World's Most Ethical Companies, marking our seventh consecutive year of receiving this honor. The Ethisphere Institute is a global leader in promoting and defining ethical business practices. It is an honor to be acknowledged among the world's most respected companies for our dedication to ethical standards and corporate social responsibility. Our corporate goal for the next three years is to further enhance our value-added solutions platform that meets our customers' needs through a network of trusted advisors. This commitment is at the heart of why our customers rely on us. We strive to help our customers run more efficient and successful practices so they can focus on providing the best clinical care. The three main priorities outlined in our 2018-2020 plan include expanding our core distribution business, enhancing customer loyalty through our value-added solutions, and investing in exclusive proprietary products. We plan to achieve these goals by strengthening our distribution capabilities and value-added solutions, while collaborating with manufacturers focused on leveraging Henry Schein's brand and developing exclusive proprietary brands alongside specialty products. We will concentrate on digital commerce, high-margin specialty products, and technology solutions, expanding our global footprint and investing in Team Schein, our most valued asset. Now that I have shared a great deal, we are open for questions. Operator, are there any questions from participants on the call?

Good morning. Thanks for taking the question. I guess starting off with the dental, Stan, could you give us a little bit more color on the strong equipment growth you are seeing in the US? I mean inventory on the balance sheet continues to build and maybe if you can provide a little color there. Then the follow up is in animal health. Just wondering how the Merritt acquisition that you guys announced last year is coming along. How the integration is going? Thank you.

Let me begin by stating that the Merritt acquisition is fully integrated. We have met, and possibly exceeded, our expectations. In terms of equipment, we are well positioned to assist practitioners in leveraging new technology to enhance their practice efficiency and improve clinical care. This opportunity is present not only in the US but also internationally. We are pleased to be a full-line distributor of the Dentsply Sirona product range, and our growth in equipment sales and related services extends beyond Dentsply Sirona to several other manufacturers I mentioned earlier. We are strongly positioned to continue this growth in the dental market. Dentists are investing in their practices, eager to incorporate the latest technology, which reflects their optimism about the future of dentistry. Additionally, I would like to highlight that, in Canada and internationally, dental laboratories are also investing significantly in their facilities and digital technology.

On part of your question, let me just first add that 18% sales growth included both strong growths in traditional equipment, traditional equipment was double digits and high-tech equipment was also double digit a bit higher than the traditional. So it's really across the board strong sales growth in all aspects of dental equipment in North America. Related to our inventory, yes, we did have to bring in inventory in order to meet demand and expected demand for Dentsply Sirona products, it's typical for us to have showroom inventory as well as being able to fill the orders as quickly as the customers need or want. But I will say that both on working capital we do have a goal of improving inventory turns. I'd like to see somewhere close to half a turn improvement over the next year or so. So we do think that there is opportunity to become more efficient on inventory management going forward also.

Thank you. Good morning, everyone. I have a question for Steve or Stanley. I've noticed over the past few quarters that you've been approaching the 3% figure for dental consumables in North America, excluding some fluctuations. Do you believe that's a reasonable estimate for 2018? I understand you don't provide specific guidance, but that seems to be the trend. Is there any reason we shouldn't expect that figure to repeat this year? Additionally, I've heard that the flu season might be affecting cancellations early this year. Are you receiving any feedback from your customers regarding dental trends being influenced by the severe flu season we've been experiencing?

So, Jeff, on the market, the market is relatively stable. Maybe it's growing a percent - potentially a little bit more than that. There is a bit more optimism now than perhaps a year ago. So it's definitely leaning in the positive area. And we continue to gain market share, we hear this from our manufacturers, the data that is available showing us that we continue to gain market share. Whether we grow 2% or 3% or 4%, it's sort of in that range. And let me just emphasize that equipment is very strong. We expected to remain strong because dentists are investing in their practices. As it relates to flu, yes, I think the statistics are out there that flu is having impact on the population. I think it's the highest percentage of the population to be affected by the flu virus in many years. So I think it will impact visits to dentists in specific parts of the country. But I don't think that will have a significant impact on Henry Schein's ability to deliver results we are focused on and we anticipate.

Okay, great. Maybe as a follow up just on the FTC case. I am sure you can't say much or won't say much but I think you had 14 days to respond to the complaints included in that filing. And if you didn't then they were deemed to be admitted to. From your comments, Stanley, I am assuming you are going to respond to each of those complaints. But, Steve, I guess I am wondering also if there is anything embedded in guidance from a cost standpoint either from a compliant standpoint and an independent monitor standpoint or legal expense standpoint how should we be thinking about the expenses embedded in 2018 guidance from this issue? Thanks.

So, Jeff, Steven will address the financial aspect. However, I want to highlight that this is the very first time we have commented on litigation. We believe this case is utterly outrageous and this is the key point. We have been working with dental buying groups for many years. In fact, we were the company that pioneered the concept of engaging with special markets and customer groups. We continue to engage with very large and mid-sized buying groups, and we are now being accused of refusing to do business with these entities that we have been working with for over 20 years. We completely deny these allegations. We cannot speak to the actions of others, but we believe we have done nothing wrong, and this case lacks merit in our opinion. Henry Schein takes pride in ethical behavior, compliance with laws, integrity, and honesty. It is illogical for us to agree to do something we are already doing. The FTC is accusing us of actions that we are genuinely undertaking. This entire situation does not make logical sense, and we strongly reject these allegations. Notably, this is the first time in our 22 years as a public company that we've commented on litigation due to its outrageous nature.

Yes. So the only thing I would add on that is that the complaint if you take the time to read the complaint has some, what I would call, provocative comments. But don't be swayed and I am glad that you asked the question, Jeff, for the benefit of everyone, don't be swayed by provocative statements. Go back to the basics which Stanley just mentioned which is how could we be accused of conspiring not to sell to certain buying groups when we are selling and we have been selling and we've always sold to the same buying groups. So again, be careful not to be swayed by again provocative statements in the complaint. As far as financial impact, again, there are no monetary damages or fines that the complaints are seeking. It's only injunctive relief; we do have an estimate built into our guidance for some legal costs and other costs in order to deal with the matter. Hopefully we have estimated that well although as you can probably guess it's hard to estimate that with perfection. But we do believe that we have it adequately covered in the guidance.

Yes, thanks for taking my question. Stan, I apologize in advance for hitting this FTC issue one more time. But I think it's such a big deal for investors. You seemed to make the case that you were selling to the certain classic customers all along and hence the complaint is meritless, but if you look at the complaint they actually say that the companies were conspiring to refuse to provide discounts. So it kind of sounds like in the complaint that the company may have been treating this one sort of customer class a little bit differently from a discounting perspective. And I guess what investors are nervous about if that's true, will you have to adjust your business practices in a way that kind of make you slightly less profitable on a go forward basis. So you may not be able to comment but I figure I would throw out there.

So we deny these allegations. We have been a company that has worked with GPOs whether it's in the dental space, the medical and animal health space for a long time. I don't think, can't imagine any scenario where we have to now start adjusting our pricing policy because of the FTC complaint. We have been servicing these customers, we were the company that conceived the notion of special markets 22 years ago where we went out to service large group practices, we now have a mid-market group that is focused on mid-market practices. And have supported small practices involved in buying groups for a long time. So this whole thing doesn't make sense from a Henry Schein point of view. And I don't believe this would impact our margins as possible. I don't think other factors could impact our margin and as Steven has noted on many occasions we are working to increase our efficiency to advance sales higher margin products etc. But I don't think this particular set of circumstances will impact our margins.

Okay. I appreciate that. Maybe just one follow-up for Steven on the guidance. Steven, if you look at the raise, it looks like you raised about $0.18 at the mid-point and you also absorbed the incremental $0.02 cost in the employee comp expense. And so if you think about that as an equivalent of $0.20 raise, some are concerned that if you look at the tax differentials that that would have been a little bit bigger than $0.20 would have implied a little bit more than the $0.20 raise. A little bit surprising giving how strong the organic sales trends seemed to be and the momentum seemed to be heading in the right directions. So any sort of comments as to sort of reconcile those two points so we know how to think about that?

Our increase in guidance was solely due to the tax impact associated with the $0.02 comparable that we discussed. We did not adjust our guidance for any other areas of the business. If you calculate a tax rate reduction of approximately 3% to 4%, and use the midpoint of that estimate, you will likely arrive at the guidance we provided. It's important to remember that tax laws are complex, and we are still navigating them. Therefore, we aim to be somewhat conservative with our guidance due to the various factors, including the proportion of our income that is subject to U.S. taxes compared to other jurisdictions. Again, the adjustment in guidance was only related to this tax impact. Additionally, in the first quarter of this year, we experienced an unusual tax benefit related to long-term compensation due to stock price performance over the last three years ending in Q1 2017. We do not anticipate a similar benefit for 2018, which also factors into our tax guidance. But if you perform the calculations as I've explained, you should find that our guidance aligns closely with these estimates.

Hi, great, thanks for the questions. I just go back to the US dental equipment, 18% internal growth. I know, Stanley, you mentioned that it was a combination of legacy equipment that you had access to and then also obviously the Sirona portfolio that's new. Is there any more perspective you can share there for us? I think it's important for investors to try to parse out just how much of that big ramp in growth was attributable to your access to the Sirona portfolio specifically?

We are not providing guidance on the breakdown of sales from the manufacturers. I believe Steven has some clarifications on this. We have never disclosed that information, so it would be best to ask the manufacturers directly.

Yes. No, I don't want to give specific supplier guidance. But we did say that traditional equipment was very strong also at double digits within that 18%. And I'll just comment that the Dentsply Sirona was not a significant impact on our traditional equipment. It was more A-dec and other lines that we have. And Dentsply Sirona really impacts more for us, the high-tech equipment at least in this most recent quarter. So, again, it was really broad-based our equipment sales growth. So we are very pleased with that.

That's helpful. And I guess just go back to the FTC complaint. I know, Stanley, clearly we understand your view on the matter. But I was more curious just if you guys could talk to what the range of outcomes is possible from this? Is there anything you can share with us as far as what types of resolutions on what timeline we might expect? I don't think there is another official trial date until October, so just wondering what kind of guideposts or types of outcome we should think about related to this.

Bob, if you pull the complaint because it is public information. You can see what the complaint is asking for relief, so there are details in that. And rather than me going by memory, I refer you to the complaint directly. But, again, it's all injunctive relief. There are no financial damages but take a look at the detail complaint because that's all we know at this point.

Thanks, everyone. Good morning. I have two questions. Let me start by discussing the international dental consumable results, which I believe decreased by 2.6%. This has been the first negative quarter I've seen since the first quarter of 2015. You have managed international operations well despite some macroeconomic challenges. Is there anything specific to note regarding this, or do you anticipate a recovery in the upcoming quarters? I also have a quick follow-up. Thank you.

Well, the weakness internationally really was not a new event although maybe it's more pronounced this quarter. We did talk about in certain European countries specifically Germany with some weakness in that market last quarter. That's continuing. I think we do believe that European market is still a very good market. We are very focused on improving our value add component. We are very advanced in the US and some other market. And we are not just quite advanced at this time in Germany and a couple of other markets. But there is a strong focus on that. So I think I can't say in the next quarter necessarily, but if you think out medium term, I think that you will see more improvement in our international dental revenues.

Just and again without putting a new metric after this, you are going to have track every quarter, just simply this is too much to track for investors. But in Germany, there were five I think less business days this quarter because of the way the holidays fell. And there is a challenge in the consumable market in Italy. We don't think it's going to be the challenge for that long. And there were some weaknesses in France on consumables but we don't see any of these things as long term trends.

Okay, great, thank you. And quick follow-up. Steven, you called it a potential, I believe restructuring that you alluded to later in 2018. And frequent restructurings certainly are not common for Henry Schein. I think you last took one in 2016. So at a high level any details you can provide, what division would this be specific to? What do you guys tweaking? Because again I think restructurings prior work maybe every four or five years and now you can called out one possibly in 2018 after one in 2016. Thanks for your time guys.

Sure, Jon. We are currently exploring potential opportunities, and I mentioned this because we believe there are additional ways to enhance profitability and reduce costs. At this moment, we are still in the analysis phase and haven't completed it, so I can't provide specific details or potential benefits. However, I believe there is a strong possibility that once we finish our analysis, we will identify opportunities for profitability improvements through restructuring efforts. You're correct that this isn't something we do frequently, but we see an opportunity now and want to take advantage of it.

We don't anticipate any significant impact, especially regarding sales force reductions. We've been investing in software and systems, which we believe will enhance our efficiency and allow us to integrate past acquisitions into our core system. We've been working on this for the past six months and are close to finalizing our specific implementation plans.

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

Thanks for squeezing me in. Good morning. Couple of housekeeping. Steven, was there any outsized flu impact to the medical revs in the fourth quarter? And then could you just confirm in terms of the 2018 guidance what it embeds for currency tailwind on EPS as well as your margin expansion expectations for the year? Thanks.

Sure. Flu vaccine sales were a little bit stronger in Q4 versus Q3 but it wasn't a material impact on our overall sales growth. We do expect to sell a similar number of doses somewhere in the 6 million -7 million dose range in 2018 that's embedded in our guidance. And foreign exchange, we are really not expecting any major movement in foreign exchange from current levels. Obviously, our guidance can absorb it on the downside or have upside, small movement because the range is wide enough to absorb that. But a bit of material change in foreign exchange rate we would call it out in 2018 should have happened.

Thank you. Now Stan will conclude with his remarks.

Thank you, everyone for joining the call. We appreciate your questions, and as you can see from Steven and my tone, we remain very optimistic about the company. We are excited to implement our strategic plan for 2018 to 2020. We are confident in our high-touch, value-added approach to serving customers through a diverse range of services, delivered by our field consultants and supported by telesales, along with what we believe is top-notch electronic ordering and other business methods with Henry Schein. We are very enthusiastic about the future. Thank you for your interest. If you have any questions, feel free to reach out to Steve at 5915, which are the last four digits of the Henry Schein number.

631-3908-105

So thank you very much and we will be back in I believe 60 days right or 90 days. Just under 90 days. Thank you.