Henry Schein Inc (HSIC) — Q4 2018 Earnings Call Transcript

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

Thank you, Carolynne. Good morning, everyone. Thank you for joining us today. 2018 has been a 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 carrying 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. It's really quite profitable and expected to be even more profitable. Last, we began restructuring efforts, which Steven will discuss in further detail and which required a great deal of focus for most of the year and in particular, the last six months of the year. Together, these efforts are strategically positioning Henry Schein for continued success, and I want to offer special thanks to our Team Schein Members across the globe for the significant contributions to these important efforts. Let me add, although there were challenges in implementing all three 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 start 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 product 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 and 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 you 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 one-time litigation expenses in both periods, our operating margin was down 17 basis points compared to 2017. Again, you can see a reconciliation with 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 the continuing effort to reduce costs as part of our restructuring initiatives. Moving on. Net income attributable to Henry Schein 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 cash 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 biannual international dental tradeshow or IBS takes place in Cologne, Germany in mid-March. 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 a 1.9% sales decline in North America. However, normalizing for the impact of the manufacture 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 primarily by solid growth in existing large customers as well as, to a lesser extent, new customer additions. 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 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, 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. Internationally, internal sales growth for technology was 2.8%. 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. 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 of 2018, we announced our Board of Directors authorized the repurchase of up to $400 million of shares of our common stock. That's an additional increase. 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. Our capital expenditures for the year were about $90.6 million, resulting in free cash flow of $594 million for the year. I'll also remind people that as part of the spin-off, we will see the $1.1 billion tax-free cash proceeds that were 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 with 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 two 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 arise in the Medical market such as what we just recently announced in the North American Rescue business, which Stan 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 of restructuring activities was $62.9 million on a pretax basis or $0.31 per diluted share. These restructuring charges primarily included severance pay as well as facility closing costs and outside professional and consulting fees that were 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 modestly 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 reinvestment 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 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 two items. On a non-GAAP basis for 2019, diluted EPS attributable to Henry Schein is expected to be $3.38 to $3.46, which 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 non-audited additional financial information for Henry Schein on a continuing operations basis.

The company's Animal Health business was separated 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 periods that are presented post Q1 2019. Note that we currently expect a 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 a 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 including stock repurchases as well as contributions from acquisitions. So with that financial summary, I will now turn the call back over to Steven.

Thank you, Stanley. 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 non-GAAP results. 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 five majority-owned strategic transactions, excluding Animal Health transactions, just Dental and Medical, as we continue to expand our geographic presence and enhance our product offerings. Together, these acquisitions have generated 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 three concepts, three major goals. Just 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 programs that we will be advancing. The third component is partnering with a broad set of manufacturers as well as building Henry Schein brand equity with the key goal of expanding product margins. For the fourth quarter of 2018, I would like to start with a review of our Dental business. The fourth quarter dental sales in North America were impacted by a weak market in November and December. Additionally, our global sales in the CAD/CAM category decreased by about 7%. We also faced a challenging comparison in North America dental equipment due to the first full quarter of having access to the Dentsply Sirona Dental equipment line in the U.S., which contributed to the difficult comparison for the fourth quarter, particularly in CAD/CAM. We are in the early stages of adopting digital solutions for dental practices and laboratories, including CAD/CAM products. Currently, it's estimated that penetration in the U.S. is still less than 20%. However, the dental market will certainly continue to embrace digital technology as these devices enhance practice efficiency and productivity. Growth in this market is anticipated to be strong in the coming years. In terms of sales, North American traditional equipment grew by 3.8% in local currencies during the fourth quarter. This was off of solid sales growth in the fourth quarter of 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 have all grown. 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 three 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 innovation. Before we move on, let me comment on the agreement we recently signed to acquire a majority stake in Yu Han Hong Chen, 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 we 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 leader 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'd 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. They 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 higher 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 of 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, as it is referred to in the marketplace, which is a leading provider of survivable and quality care medical products to defense and public safety markets. NAR has an extensive 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, product offering, as well as margins in both the U.S. and as we advance NAR's business across the globe. Let's move on to our Technology and Value-Added Services business. Henry Schein One has just completed its first two 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. 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 for growth for practices with differentiated demand creation tools. We're offering our customers a host of new tools to engage with their patients while simultaneously increasing the recurring revenue. We also have the opportunity with this exciting platform to expand our dental software ability across the globe, particularly as we pair these tools with the growing practice management software presence abroad. We are pleased to announce that Dentrix Enterprise solutions, along with Cerner solutions, was selected for the contract with the Department of Veterinary Affairs as part of the project to modernize health care solutions for the military. Recently, Henry Schein One rolled out several key platform updates for patient engagement, patient financing, and clinical decision support solutions. We also launched our OmniCore all-in-one dental office medical solution, which includes hardware and dental office maintenance. Looking ahead, we are working on new product launches to attract new patients, so our customers as well as live check solutions aimed at improving conversion rates as patients search online for dentists. Henry Schein One has numerous projects in progress and serves as a foundation for future technology acquisitions to enhance our value-added solutions in various regions, targeting both general practitioners and specialty practitioners. This includes our investment in Robo 2, a prominent provider of practice management software for orthodontists in the United States and Canada. Before we take your questions, I want to address some concerns from the investment community regarding growth and operating margins. It’s essential to reiterate that we have always operated in price-competitive markets, and this will continue. Our strategy focuses on delivering value-added solutions that help clinicians manage their practices efficiently, which is crucial for both their clinical and economic success. We also acknowledge that practices are evolving, and consolidation will proceed at different rates in dental and medical sectors. I want to highlight our success in providing value to our large customers while navigating consolidation in the medical market, where most smaller practices are now part of larger group networks. We consistently achieve attractive sales and profits in this area. We believe our medical and dental customers prefer Henry Schein because we work closely with practitioners and effectively serve as an extension of their practices. Our pricing reflects the value we deliver, and it's a balance we maintain daily. We do not anticipate significant changes in this regard, even as our customers consolidate. Instead, we expect practitioners to continue recognizing the value we provide and compensating us accordingly. Second, we have discussed the priority of adding more high-margin products to our portfolio. The recent implant acquisitions in dental and agreements acquired in North American Rescue and Medical are excellent examples. We will also continue to invest in building scale in distribution in all 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 margins and costs. 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, we will open the call to questions.

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 three different factors. There's stranded costs that are impacting. There's 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 three factors? And then how are you thinking those three factors combined to impact then the 7% to 9% growth guidance for 2019?

In 2018, there were no significant impacts from stranded costs as nothing was stranded during that year. Additionally, there was no effect on TSAs and reimbursements. Since we did not receive the cash until the first week of February 2019, the influence of the $1.1 billion is not accounted for in 2018. We will address these matters in 2019, as I recognize there may be some confusion. Regarding the cash infusion, it represents 11 months' worth of impact, but it’s crucial to consider a few points about our interest rates. We had temporary credit lines ready in anticipation of that significant cash infusion, which came with low interest rates due to being tied to favorable floating rates. We also factored in potential interest rate increases in 2019 for conservative forecasting. For stranded costs, we anticipate a modest amount in 2019, likely in the several million dollar range, and while this may fluctuate, it is currently included in our projections. Looking at 2018 expenses, it's worth noting that specific variable costs tied to providing services to Covetrus were not included, so we expect higher expenses in 2019 due to increased variable costs associated with those services. Additionally, in Q4, we noted that foreign exchange negatively impacted our results by $0.02 per share for that quarter, and we project that this exchange headwind will persist in our guidance. Lastly, we observed a soft market in some regions in Q4, and we are not assuming improvements in market conditions going forward. While we hope for a more favorable scenario, we believe maintaining conservative assumptions based on recent trends is the prudent approach for our guidance.

That's helpful, Steve. And just my very quick follow-up. Regarding the amended 8-K that you filed on Friday and the restated pro forma numbers for 2018 year-to-date, can you clarify if those numbers decreased because of stranded costs, or did they decrease due to an allocation or reallocation that identified additional costs associated with the business, necessitating the restatement of the 8-K?

Yes. So it was the latter. It was not because of stranded cost. It was because when we filed the initial 8-K, and it's a very complicated separation of cost between continued and discontinued operations, and we made estimates for what pertains to continued versus discontinued operations. As we continue to refine those numbers, we realized that those estimates were not as accurate as we would have liked. Therefore, we filed that 8-K last week to adjust for that.

Maybe just sticking on guidance. You talked about EPS growth of 7% to 9% from continuing operations. That, I guess, is at the lower end of the longer-term target of high single to low double digits. So Steve, can 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? They look like pro forma margins were roughly flat. I'll just be curious what you're expecting for 2019.

Sure. Some of the points I made in earlier questions are worth repeating. There is an impact from stranded costs in 2019, and we expect some foreign exchange challenges. One additional observation is about the flu season this year, which has been notably mild. While this did not affect our sales of the influenza vaccine, we are seeing continued impacts into Q1. Patient traffic for those experiencing flu-like symptoms visiting their doctors has declined, leading to a decrease in sales of rapid in-office flu tests. Consequently, the use of other products typically utilized during such patient visits is also lower. This situation is temporary, as the flu season primarily occurs in the winter months and ends after Q1. However, we are accounting for this softness in our forecasts. It has been an unusual season, and we need to integrate this reality into our guidance.

Okay. Can you share your expectations regarding margins? There are various factors at play with the restructuring savings. How should we approach our understanding of margins for the 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 cost 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.

Stan, you mentioned a few minutes ago that the product is the third of your three 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 kind of a preferred formulary type of structure? Any additional details would be really helpful.

It's a great question, and I'm happy to address it. Henry Schein's strategy for 2018 and 2020 has three key components. First, we aim to enhance our distribution businesses, which I'd be happy to discuss further, although it may not directly relate to your inquiry. The second component focuses on investing in and expanding our value-added services. We provide two types of services: some are offered for free or at minimal cost to customers purchasing consumables and equipment, while others, like those from Henry Schein One, incur fees. We intend to grow that platform and work with suppliers and partners interested in helping us enhance its profitability and customer connectivity to achieve unique interoperability. However, I believe your inquiry pertains more to our third focus, known internally as brand equity. A fundamental aspect of this is our specialty businesses, particularly our efforts in advancing our oral surgery division, which includes implants and bone regeneration materials. Our aim is to create a comprehensive resource for oral surgery and general practitioners in this field. We're performing well here, gaining market share, and planning to continue our investments. The next focus area is endodontics. Our goal remains the same; we will carry all brands while also promoting our own products, such as brushlets and edge, with more potentially on the way. This represents a high-margin opportunity for us, and we will maintain collaborations with branded manufacturers eager to partner with us for distribution. Our third area of focus is orthodontics, where we'll keep investing. We've made solid progress and have some proprietary offerings, notably our SLX Clear Aligner system and its related products. We expect continued success in this area, backed by positive feedback from key opinion leaders and customers. Our goal is to operate in areas where we're not in competition with our manufacturing partners. We don’t intend to manufacture equipment ourselves and will emphasize opportunities that offer high margins and value for our customers, all while integrating our brands with a complete range of other products for a comprehensive solution.

Steve, this one might be for you. I'm sorry, Stanley as well. But I just want to make on the trends if I circle back. And so on the North American trend 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 will just be also any difference that you saw in 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, we saw our implant business growth in the 7% range, organic growth in the 7% range, which was a strong number for us. We also saw another specialty with some nice growth in excess of the recorded growth. What we saw specifically in the U.S. and North American market was that the 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, and it's only, call it, two weeks into February. 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.

Like me just add one other factor. 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 distribution business. So although the impact of top line growth in these businesses may not be that material or not be obvious, the bottom line increase is quite important. 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. 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 just as a follow-up question is it sort of built on maybe Nathan's from earlier. But just longer term, Steven, the up margin goal for the company, you talked about why it may be flat. This year, you've got some stranded costs, you've got some FX headwinds. But when we look at longer term, you used to talk about 20 bps of O&M expansion for the legacy co. Do you see you that as 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, John. 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 next to higher margins. 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, Steve, 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 the two legs of higher 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. Lots of opportunity there for margin expansion. Likewise, in the specialty areas where we can remain excited and think that we have opportunity to continue to grow market share in a market that is quite healthy.

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 balanced here in February. But were you ever able to pinpoint what caused the softness? I mean, is it really just kind of a resetting of 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 with 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 guys give some color on higher-margin equipment in 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 and regulatory and legal to advance. We have a $60 million business. We will close shortly on another $14 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 number one and number two player. They went through last year the integration process. 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 it's 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. Those opportunities advance our business in the Southeast Asian 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.

Can you talk about 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 is $400 million of sales. What exactly are those tools? And how permeated is the solution into like your dental base? Can you 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 a little bit of color. One of the things I would invite people, we have had some people, some investors go out to our technology center in Salt Lake City and the people would like to get a demo of the technology and the software that drives this, we can set something up. But quickly in summary, we have a number of terrific 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 when patients have not returned. We could also include in there, we have some certain products with Henry Schein One that can 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, 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 the patient communications to us. It's been very effective. We also have recording that shows them the effectiveness of what we're doing. If you ask any dental practice what the top three concerns are, patient traffic and demand is probably in those top three. So this really addresses something very important to the dental practice and really addresses the value of Henry Schein that we're more than just, again, a rigid supply of 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, and this is just one of those. Hopefully, that helps with a little bit of color. Again, if everyone likes to get detailed demos of those products, we can try to set something up. Maybe we can even do something remote where people can call into a webinar of sorts.

In the general enterprise systems that we offer, for small practices, midsize practices, large practices, U.S. government, for example, military, the PA, 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 traffic volume to dental offices, do you think 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 and late in the year, they're less inclined to have services performed, and if the market comes back and they see the value of their savings rising and they're more inclined to use sort of their savings to have services? Any correlation there in your mind or not? What do you think?

There are numerous discussions among our sales team regarding customers, and everyone has their perspective. Some believe that Christmas and New Year's sales led to lost days of activity. Others mention the weather or the influence of stock markets on consumer behavior and how dentists feel about investing in their practices. I consider these factors to have short-term effects. Ultimately, we need to evaluate how our business performs over a longer period—like one, two, or three years. I feel we are well positioned to continue growing our earnings per share. The projected growth of 7% to 9% seems conservative, especially since 2019 is a transition year with many changes happening. We should exercise some caution, particularly regarding the global economy and foreign exchange trends. However, once things stabilize in 2020 and beyond, I believe we can achieve our goals of growth in the high single digits to low double digits, around 9% to 12%, which we find reasonable. We're investing in the right areas and reinvesting our cash. We often make substantial investments upfront, which includes acquisition costs and occasionally writing down inventory or taking amortization charges into consideration. Overall, we factor this into our strategy. Our three-part strategy is very promising, with a strong plan in each of our businesses aimed at executing and fostering organic growth. We are also ready to allocate capital competitively where we see the best returns.

Just really two quick clarification questions here. First, when you mentioned that for 2019 that the guidance assumes that the market trends will be in line with recent history, I just want to confirm whether or not you're referring to the softer trends in November or December in particular. And really without getting at it, if we think about just 2019 overall versus 2018 overall dental market, are you assuming a similar trend year-over-year or down year-over-year? I just want to sort of clarify your exact comment around that.

I would say it's somewhat lower compared to the full year 2018. It reflects the recent trend of some softness in Q4 that has continued into January. It's difficult to determine if this is just a temporary situation or if it will persist for a few more quarters. Therefore, we're being somewhat conservative in our assumptions.

Okay, great. And 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 a few weeks ago, but could you give a number how much debt you paid down so far in calendar '19?

Yes. We used the entire $1.1 billion to pay down in 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. So you basically used all of it at this point in 1Q '19 to pay down debt? Okay, great.

I think we need to conclude the call since we committed to an hour and have exceeded that time. I apologize for the lengthy introduction; it was necessary to provide some context. To wrap up, many of my comments were included in response to the second-to-last question. We are very optimistic about the future of Henry Schein. We are positioned well, and our emphasis on wellness and prevention is crucial for managing healthcare costs and the well-being of the global population. Our focus on the human aspect of wellness and prevention will benefit our investors in the long term. We are continuing on a successful path, marking 24 years as a public company after many years as a private entity. We have strong themes and solid disciplines within our business. Our medical and dental customers trust us, and our brand remains strong. We will keep delivering innovative solutions, as this is a daily focus for our team. Steven and Carolynne are heading to Chicago this afternoon for the midwinter dental tradeshow, one of our largest dental conventions in North America. Although I will not be attending this year due to a recent successful back surgery that has confined me from flying for a month, I want to reassure you that I will be working hard. I plan to attend the IDS meeting in Chicago and Cologne next month, and I am in good health. You are in capable hands with Steven and Carolynne. Feel free to visit our booth, and I can arrange a tour of certain software systems and other fascinating aspects of Henry Schein. Steven and Carolynne are available to answer any questions you may have. If you have more specific inquiries, you can reach out to Carolynne Borders or contact Investor Relations at 631-390-8105, and Steven is also available. I look forward to updating you on our first quarter results. We'll reconvene in May, and I am truly excited about the future of Henry Schein. Our team is motivated, we have solid plans, and last year was historic for us. We made significant progress, and the team looks forward to continuing in our described direction. Thank you for your interest.