Henry Schein Inc (HSIC) — Q1 2019 Earnings Call Transcript

Thank you, Hallie. And thanks to each of you for joining us to discuss Henry Schein's results for the 2019 first quarter. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein, and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward-looking statements. These forward-looking statements are qualified in their entirety by the precautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission, including in the Risk Factors section of our Annual Report on Form 10-K. 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. Our conference call remarks will include both GAAP and non-GAAP results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods for certain items that may vary independent of business performance, and allow for greater transparency with respect to the key metrics used by Management in our operating of our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for the corresponding GAAP measures. These reconciliations can be found in the supplemental info on our Investor Relations website. The content of this call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 7, 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. Please limit yourself to a single question and a follow-up during Q&A. And with that said, I would like to turn the call over to Stan Bergman.

Good morning. Thank you, Carolynne, and thank you all for joining us today. We are pleased to announce record first quarter financial results from continuing operations. Internally generated sales growth in local currencies was 4.3%, and EPS growth from continuing operations was approximately 8% on both GAAP and non-GAAP basis. We are also raising the top end of our guidance for 2019 on a non-GAAP financial guidance range basis. We are pleased with our performance to date as we execute on our 2018 to 2020 strategic plan. We have completed the first quarter of what we have characterized as a 2019 transition year as we continue to separate operations of our former Animal Health business. Throughout this transition, we believe we gained market share in both of our Global Dental and Medical businesses and we are quite confident that Henry Schein is well positioned, and believe, actually, continues to be well positioned for operational success over the long term. Our focus remains on supporting our customers around the world with the broadest array of products and services, along with innovative technology that expands our value-added solutions offering while pursuing new investment opportunities. So it's about inorganic growth and organic growth by helping our customers operate a more efficient practice so that they, on their end, can provide better quality care to the public. We are very excited about the opportunities we have to continue to grow our business on a global basis through our investments in scale and innovation. So at this time, let me ask Steven to review our financial results and guidance and then I'll provide some additional commentary on the recent business performance and accomplishments. Please, Steven.

Thank you, Stanley, and good morning to all. As we begin, I'd like to point out that I will be discussing our results from continuing operations on an as-reported GAAP basis and also on a non-GAAP basis. Our Q1 2019 and Q1 2018 non-GAAP results exclude certain items that are detailed in Exhibit B of today's press release, which is available on our Investor Relations section of our website. Please also note that this quarter we have included a new corporate sales category that represents product sales to Covetrus under the transitional services agreement entered into in connection with the animal health spin-off that was completed in February 2019. We expect these sales to Covetrus to continue into the first half of 2020 and we note that because these are low-margin sales that have little impact on our operating income. For fiscal 2019, we expect those corporate revenues to total approximately $100 million. Also, please note that we adopted the new lease accounting standard in the first quarter. As a result, our Q1 balance sheet includes additional lease assets of $248 million and lease liabilities of $256 million. The new standard did not materially impact our consolidated net income and had no impact on our cash flows. Turning to our Q1 results, net sales from continuing operations for the quarter ended March 30, 2019 were $2.4 billion, reflecting a 3.8% increase compared with the first quarter of 2018, with internally-generated sales growth in local currencies of 4.3%. When excluding those product sales to Covetrus under the transitional services agreements, internal sales growth in local currencies was 3.7%. Please note that the details of our sales growth are contained in Exhibit A in our earnings news release issued today. On a GAAP basis, our operating margin for the first quarter of 2019 was 7.3% and improved by 17 basis points compared with the first quarter of 2018. On a non-GAAP basis, which excludes restructuring costs, our operating margin was 7.5% and expanded by 25 basis points on a year-over-year basis. You can also find a reconciliation of our GAAP operating income to non-GAAP operating income in the supplemental info page on the Investor Relations page of our website. Turning to taxes, our reported GAAP effective tax rate for the first quarter of 2019 was 24.6%. This compares with a 24.4% GAAP effective tax rate for the first quarter of 2018. On a non-GAAP basis, our effective tax rate was 25.4% and compared with the prior year non-GAAP tax rate of 24.4%. Again, please refer to the supplemental information page on the Investor Relations page of our website for a reconciliation of GAAP taxes to non-GAAP taxes. We estimate that our full-year effective tax rate will continue to be in the 24% to 25% range on a non-GAAP basis. Moving on, net income from continuing operations attributable to Henry Schein, Inc. for Q1 of 2019 was $118.4 million or $0.78 per diluted share, and this compares with prior-year GAAP net income of $111.5 million or $0.72 per share. Our non-GAAP net income for the first quarter of 2019 was $120.6 million or $0.80 per diluted share, and this compares with non-GAAP net income of $113.6 million or $0.74 per diluted share for the first quarter of 2018. This represents growth of 6% and 8.1%, respectively. To provide some additional details on the results of our operations, I'll note that amortization from acquired intangible assets was $21.8 million on a pretax basis or $0.11 per diluted share for Q1 2019. That compares to $18.7 million pre-tax or $0.09 per diluted share for the same period last year. I'll also note that in Q1 of 2019, foreign currency exchange negatively impacted our diluted EPS by $0.015 for the quarter. Let me now provide some detail on our sales results for the quarter. Dental sales of $1.5 billion decreased 0.1% compared with the prior year, with internal growth in local currencies of 3.2%. North American internal growth in local currencies was 2.7% and included 2.5% growth in sales of dental consumable merchandise. And with that, we believe we continue to gain market share in the North American dental consumable merchandise market, and our dental equipment sales and service revenue increased by 3.3% over the prior year. Our international dental sales growth in local currencies was 4.0% and included 5.5% growth in sales of dental consumable merchandise. We believe our international dental merchandise sales growth benefited from either one or two extra selling days in certain European countries due to the timing of Holy Thursday and Good Friday holidays, which occurred in Q1 last year and are in Q2 this year. We anticipate seeing this benefit reverse next quarter. Our international dental equipment sales and service revenue declined by 1.2% versus the same period last year. As we noted last quarter, the International Dental Show or IDS took place in Cologne, Germany in mid-March. This trade show customarily results in lower international equipment sales in Q1. They typically accelerate in Q2 and beyond. Turning to medical; our medical sales were $683.7 million in the first quarter, an increase of 6.8% with internally generated sales growth in local currencies of 5.1%. The 5.1% internal growth in local currencies includes 4.9% growth in North America and 9.9% growth internationally. We were pleased with our overall medical sales results, which were driven primarily by solid organic growth from existing large customers along with strategic acquisitions. As we noted on last quarter's conference call, we expected our medical sales in Q1 to be impacted by the continuation of a below-average influenza season, which led to physician office visits and related sales from test kits to be lower than prior years. Our technology and value-added services sales from continuing operations were $115 million in the first quarter, an increase of 35.1% with internally generated sales both in local currencies of 2.1%. In North America, technology and value-added service sales on an internal basis in local currencies saw a 0.9% increase compared with the prior year, and in international markets, our internal sales growth in local currencies was 7.0%. We continued to repurchase common stock in the open market during the first quarter, and we bought approximately 2.5 million shares at an average price of $59.45 per share, totaling approximately $150 million. The impact of the repurchase of shares on our first-quarter diluted EPS was immaterial. At the close of the first quarter, Henry Schein had approximately $250 million available and authorized for future repurchases of common stock. Let's take a brief look at some of the highlights of our cash flow. We have very strong operating cash flow from continuing operations for the quarter at $133.3 million, compared to a negative $64.6 million in the first quarter of last year. We continue to believe we will have a strong operating cash flow for the full year 2019. As part of our previously disclosed restructuring initiative, we recorded a pre-tax charge in Q1 of 2019 of $4.6 million, or $0.02 per diluted share. This restructuring charge primarily includes severance pay, facility closing costs, and outside professional consulting fees directly related to the restructuring plan. As you know, we have extended our restructuring initiative and expect to continue it through Q2 of this year as we look for more opportunities to save ongoing costs, mitigate stranded costs over time related to the animal health spin-off, and also use some of that savings to advance our technology investments, including reinvesting in our CRM project, our European ERP project, and our web interface developments. Turning to guidance; we are increasing the top end of our 2019 non-GAAP financial guidance range today. At this time, we are not able to provide estimates for costs associated with restructuring for 2019; therefore, we are not providing GAAP guidance. On a non-GAAP basis, 2019 diluted EPS attributable to Henry Schein is expected to be $3.38 to $3.50, reflecting growth of 7% to 10% compared with the 2018 non-GAAP diluted EPS from continuing operations, which was $3.17. Again, this compares to our prior guidance of $3.38 to $3.46 and that was a 7% to 9% growth. So again, we increased the top end of our range by $0.04 per share. The company's Animal Health business was spun off to shareholders as of February 7, 2019 and that business has been classified as a discontinued operation starting in this current quarter and for all prior periods that are presented. Our guidance for 2019; non-GAAP diluted EPS attributable to Henry Schein is again for continuing operations as well as any completed or previously announced acquisitions, but does not include the impact of any potential future acquisitions. Our guidance also assumes that foreign exchange rates are generally consistent with current levels and this guidance also assumes that our end markets remain stable and consistent with the current market conditions. As we noted last quarter, we remain confident in our goals of achieving long-term organic sales growth of one percentage point to two percentage points above the underlying market growth, and we expect non-GAAP diluted EPS growth will continue to be in the high-single to low double-digit percentages for Henry Schein. This includes our stock repurchase activity and contributions from acquisitions. So with that, I'd like to turn the call back over to Stanley.

Thank you very much, Steven. Let's begin with the review of our business highlights for our first quarter starting with Dental. Our North American Dental consumable merchandise sales grew by 2.5% in local currencies, which is in line with the growth of the preceding quarter as end market growth has been quite stable. We believe that we modestly increased our market share versus the first quarter of last year. North American Dental equipment internal sales growth of 3.3% in local currencies improved from the fourth quarter of 2018, as we saw strength in sales of CAD/CAM products, which grew by approximately 20%. In particular, digital impression sales increased by nearly 30%; internal sales in local currencies for traditional equipment increased by approximately 2%. Internationally, dental consumables internal sales in local currencies had robust growth of more than 5% due in part to the timing of the Easter-related holidays as Steven mentioned. This timing variance aside, we believe the end market is generally stable in the International Dental consumable market that we serve and that we'd continue to gain market share. Likewise, on the equipment side, we believe the market is stable. In fact, in certain markets, it's growing quite nicely. In March, we participated in the IDS event in Germany which occurs every two years. Our international dental equipment internal sales in local currency declined by approximately 1% during the first quarter due largely to this event, as dentists in Germany and the surrounding countries often hold off on equipment purchases until after attending the show. This typically leads to a rebound in sales in the second quarter in an IDS year. Advancements in CAD/CAM and digital impression solutions were one of the highlights of the IDS as the technology has become faster and easier to operate, which many believe will lead to broader adoption of these technologies in the years to come. In fact, we believe that most dental practices will have digital impression capabilities as the standard of care within five or so years. Today, practices have access to a broad selection of options from basic scanners to full systems to promote fast and accurate scans through these scanners that are far more comfortable for the patients to fully integrated systems that enable a practice to conduct full procedures, including the production of crowns and bridges in one visit, all at a range of price points that enable the practitioners to choose what is right for the customer's specific need. We are clearly at a very exciting time for the industry given the advancements made in digital dentistry workflow. This excitement extends to all of our digital dentistry solutions, of course, including implants, orthodontics, and even endodontics where we leverage deep relationships with our specialty practices and general practitioner customers as well. In particular, internal sales of global implants and endodontics and orthodontics each grew in the mid-single digits to low double digits in local currency during the first quarter. We're particularly pleased with the growth in our specialty businesses. At IDS, we were excited to announce a variety of innovations, implant-based tooth replacements offered through our BioHorizons and CAMLOG brands. This included the launch of a new implant system called the PROGRESSIVE-LINE, a few line extensions to BioHorizons Tapered implant system and the introduction of our interest-dependent system that promotes fast patient bone regeneration. Now let's review the medical business; the influenza season in the first quarter of 2019 was fairly light in terms of office visits. On the other hand, these tests and related surgical products are really important for our customers, the office-based practitioners and the urgent centers. Yes, we delivered solid medical internal growth in the first quarter of approximately 5% in local currency despite the reduction in office visits relating to the influenza season. We're excited to have recently launched our new point-of-care diagnostics tools for medical customers. This is one of the fastest-growing product areas in healthcare as consumerism is driving preference for on-demand test results. To address this need and capture growth in this area, our medical team has created a point-of-care diagnostics specialist team. This specialized team will provide expertise in the diagnostic landscape and offer a consultative approach to address practice needs. For example, we have been working diligently to expand our private label portfolio with cost-effective, high-quality solutions for our physician offices, clinics, and other traditional laboratory customers so they can deliver quick, convenient, and reliable tests at the point of care with laboratory-quality performance. We recently held in Denver, Colorado, our most successful medical national sales meeting bringing together our team from across the US to discuss our strategic priorities and sales initiatives for the year ahead. Just like our Dental team, our Medical team Schein members are highly engaged to provide our customers with the highest level of service support, in effect, helping our practitioners focus on operating in a more efficient practice so that they can focus on providing the best in quality of care. As we look to the future of our medical business, we believe we are well-positioned to drive continued market share gains from our partnerships with large group practices plus independent physician offices and alternate site of care. So let's move on to the technology and value-added services business. For three quarters now, our Henry Schein One team has been hard at work combining a host of unique and powerful dental software tools that help dentists build awareness for their practice and better communicate with existing patients while also generating new patients. These tools include advanced websites, reputation management tools, very important these days, improved search engine results, online marketing, and automated digital communications, all growth areas where we're doing quite well. To summarize a few highlights: all major imaging vendors have now signed on with our Dentrix Smart image integration solution. Smart Image provides improved image access across image modalities and integration into the practice management system. Interoperability is alive and well at Dentrix and throughout our practice solutions platform. Most exciting, Dentrix Ascend continues to enhance its focus on practice and patient experience with the addition of multiple new enhancements, including more efficient insurance processing, scheduling, pin board, document management, enhanced electronic dental billing functionality, and additional electronic claim codes to help improve business outcomes. Of course, Dentrix Ascend is our cloud-based dental practice management system, and we believe the most progressive in the marketplace. Before we open the call to questions, I would like to highlight the progress we have made in our ongoing commitment to add high-margin products and solutions to a broad range of customer offerings. This is a key element of our strategic growth plan. Since the time of our last call in mid-February, we closed on the acquisition of North American Rescue, a leading provider of survival and casualty care medical products to the defense and public safety markets. NAR had approximately $184 million in sales for the 12 months prior period ending October 2018. This transaction brings us an expansive line of proprietary product brands with attractive gross margins, and these solutions will help expand our medical group presence not only in the United States but also globally. We also announced the acquisition of Lighthouse 360 from the Web.com, which provides us easy-to-use dental practice management and patient communication software with 2018 sales of approximately $50 million. Building upon our high-margin software and service businesses has been the cornerstone of our strategic growth plan, and Lighthouse 360 is an excellent example of how we're adding to our technology innovation for the benefit of our customers. This highly automated software platform will expand Henry Schein One practice marketing and client communication solutions, providing tools to better connect us with our dental customers and help dental practitioners better connect with their patients and gain interoperability at work. Our pipeline for investment opportunity is quite full. We look forward to continuing to add innovative dental, medical, and technology solutions that complement our solid organic growth profile. As mentioned, we have a particular focus on driving attractive growth and operating margin expansion over the long term, in fact, over the medium and long term. We are also focused on growing our private brand and control brand solutions as we diversify the next selection of products we offer with attractive pricing to customers and of course attractive profit margins for Henry Schein. We are doing this while still supporting our branded manufacturers and seeking to expand their market share. The efforts we have undertaken through organic and acquisition growth will be complemented by our programs to reduce costs as part of our restructuring initiative, positioning us well for long-term operating margin expansion. So, again, lots going on at Henry Schein. We remain quite confident in execution of our strategic plan, believe it's a solid plan. And with that, operator, we would like to open the call to questions.

Stan, maybe just sticking with that theme that you were just mentioning, if you think about your interest in adding new owned products, where are you most interested in doing that, private label versus brands, dental versus medical, specialty versus GP, just, if you could give us a sense of what you're most interested in? Thank you.

Thank you, John. So our goal is two-fold. One is to advance our portfolio and market share in specialty products, dental, endo, ortho, implants, bone regeneration, and products that are supporting those professionals providing specialty dental care. At the same time we've started advancing our specialty area focused in the medical arena with a line of orthopedics, blades, and swords that we're doing quite well. We've been focused on that also for a while and we focus on expanding that portfolio. So that's one area which is also supplemented, by the way, with the Henry Schein One offering because you could view it as a private brand or a corporate brand, if you will, because it's our own brand, but that's all services, the practitioner with unique products under the Henry Schein brand. At the same time, we have led for years with the expansion of sales led by an expansion of product offerings of high-quality, price-competitive products that we offer through our private brand and corporate brand. And we will continue to do that. Having said that, Henry Schein is primarily a branded national brand for value-added products. However, where we experience price competition, we lead very often with our corporate brand, our private brand, which is highly competitive and enables us, of course, to compete very nicely. So it's with branded products, our own branded products that are in the specialty areas and software, and private brand where we are offering competitive pricing, however, fully mindful of the fact that we are a national brand supporter and wish to continue to grow our relationships with those manufacturers of national brand products that see Henry Schein as a great partner.

And my follow-up is within the digital impressioning category; it sounds like that's one of the hotter dental categories at this point. Where do you think we are today in terms of penetration? Just trying to gauge how much further that category has to run before it matures. Thank you.

John, while there is some conflicting data, we believe that in the United States, fewer than 20% of practitioners are using any form of digital prosthetic device, whether that's a scanner or a fully integrated scanning machine that works with bridge and crown milling systems and software. This indicates that there's still about 70% of the market available. On the imaging side, the systems are more widely adopted, yet there remains significant opportunity for growth, especially as prices for digital imaging equipment continue to decrease. In terms of units, Henry Schein still has numerous opportunities. Digital dentistry offers substantial potential for us, particularly in the U.S., but this general trend is also evident in Europe and other regions.

I'm actually going to start with DI as well. And specific to DI, can you just talk about what the dentists are looking for? You know, DI demand is clearly through the roof, but price points vary wildly, maybe from $20,000 to $45,000. Stanley, you're in a good position where you are able to sell a wide portfolio of DI products, so where is the GP's interest when we think about the high-end versus the low-end? And then I've got more of a P&L follow up. Thanks.

Good question. I think the market is growing at all levels. First of all, there's the entry level. Those practitioners that are putting their toe in the water; that so, not necessarily going for the high-end. But you know, what's interesting is they migrate from the lower-end to the high-end as they add a second and third device. So we're doing well and have done well, by the way, for the past seven or eight years introducing new practitioners to DI advisors. We often lead with the lower end, sometimes with the mid-range, and then advance to the higher end. So I think the market is good for all, and I think what will become even more effective is the integration, the interoperability between these devices whether they're DI devices or digital imaging and our software. There is solid integration now, as we mentioned in the call; the leading manufacturers of these devices have signed up to integrate with Dentrix, a lot of the major ones are already integrated and the others will follow soon. So interoperability will drive this category, both in terms of prosthetics and imaging in a significant way in the years to come, both in this country and abroad.

Thanks for that, very helpful. And then Steven, I'll hand it to you for the second one; the margin expansion in 2019, I thought was supposed to be maybe somewhat depressed this year just with some of the transition costs that you had 25 bps of non-GAAP expansion in the first quarter. So maybe your thoughts on being able to get to your 20 bps bogey goal this year in '19 despite the TSA noise? And if so, does that mean next year could look even better? Thanks for the time, guys.

Okay. Thanks, John. So, Q1 was a very strong quarter, what we expect operating margins were able to reduce and really came from operating expense reductions. There were changes in gross margin, but some of the operating expense reductions that we were able to achieve in Q1, we don't expect to reoccur. So while we were guiding more towards a flat operating margin in 2019, there might be some upside to it, but right now it's still very early in the year. So we are pleased with Q1, but we're not ready to say we'll be at 20 basis points for the full year 2019. There are still very good opportunities that we see, and that's why we expanded the restructuring program, because we still see opportunities to take costs out of the system. So again, very good for Q1, but we're not ready yet to say that's a full-year opportunity.

Thank you, good morning, guys. Steve, wondering on the North American consumables market, if you can give us any color on what Specialty Group versus the Standard Consumables, and if you're still taking market share in the standard consumables or general consumables side, what do you think the market is doing right now outside of your General Consumables growth?

Sure. So first, excluding specialties, we think we did gain market share hard to tell exactly how much maybe 50 to 100 basis points would be the estimate that I would expect, but we did see stronger sales in Specialty products and those depending on if you're looking at implants, ortho for endo, all of those grew somewhere between the mid-single digits and the low-double digits; implants was the strongest of the level which was at the top end of that at double digits. So we're still continuing to do well on the specialty products, but there's still a lot more opportunity in Specialty as our market share is relatively small in those specialty markets.

If you could, just maybe remind us what specialty as a percentage of consumables? But then for my follow-up; I just want to understand that guidance you raised the high end of 1Q, as John said, was supposed to be maybe the tougher quarter with spend FX headwinds, some other things. You came through that really well, why does the range of EPS for the year go up if you've retired a quarter of risk and kind of got past what we're supposed to be maybe the toughest quarter of the year?

Well, let me answer your first question first. So total dental specialty product sales on a full-year basis is about $800 million, and again that includes implants, orthodontic products, endo products and within implants and bone regeneration products that are kind of complementary products to the implants. You know, I would say for the full-year guidance to be, why we raised the top end is because quite simply, we came in ahead of where we expected to be in Q1, we do not think we will give back that improvement in EPS. So we are effectively raising the guidance for the Q1 that we achieved.

Stan, if you just sitting with the North America Dental consumables I think you mentioned kind of in line with last quarter and that was despite a slightly tougher comparison when you talk to us back in February you said you had seen some softness to start the year, but now it seems like you're characterizing the market as stable. So I was just wondering if you could kind of talk to us about what played out over the balance of the first quarter and anything that you had maybe point to that improved relative to the trends that you're seeing earlier in the year?

So it did start off slow Q1, and the beginning part of Q1 but it finished very strong, and again I always try to alert investors that we need to be careful when looking at a short period of time like a month or so, because we have seen over and over again, you know, a trend where a month is exceptionally strong or exceptionally weak, but then that trend reverses in the subsequent months. So the good news is Q1 finished very strong in March; in particular, it was very strong for us in consumables. I'll turn it back to Stan.

Yes, I think you're correct in pointing out that one has to be very careful when looking at a 4 to 5-week month Android conclusions. Even in quarter, having said that, as we've said, for many years now, the dental markets are stable, and I am referring to particularly the consumable market and is leaning positively. There are some parts of the world where it's leaning more positively. The U.S. is quite stable, and there's a slight increase in units but not much, and not a lot of inflation. So the market may be growing 1% to 2%, and if it grows, one, the sales could be on the lower end, if it grows to on the higher end; but also I think it is fair to say that Henry Schein has been gaining market share for quite a long time, and we expect to continue to do that for the years to come. Very good programs to encourage customers to aggregate purchases with us of consumables, equipment, software, and particularly now specialty products, I think consistent with past the markets are stable but leaning.

And then just as my follow-up, Steve, on the TSAs can you give us a little bit more detail on the products that you're, it sounds like you're selling to Covetrus that's included in that TSA revenue line, and it sounds like those are lower margin sales, so I just wanted to confirm that?

Yes, they are very low margin sales because the TSA agreement really effectively reimburses Henry Schein for its handling costs, and that's why there is a small gross profit, but when you get down to the operating income, it's virtually no profit for us. The products vary and continue to include, for example, Henry Schein private brand sales. Remember on some of these products, it takes time to change the registrations in the packaging, and that's why we were allowing for these sales to continue, because we wanted to make sure core batches had access to the products as they get the registrations complete. So it's going to continue for a little while. Now I think you said mid-2020; it could go a little bit further because we'll try to accommodate co-batches as they need it, because we're not really buying product just for Covetrus, we're buying it for the core Henry Schein business, and if they need to tap into that from time to time, we're happy to accommodate them.

Hi guys, this is actually Ryan Cameron on for Kevin. Just to touch on FX quick. I know you expected it to be a little higher in the first half. Do you still expect that impact to subside a bit exiting Q2 or is this kind of run rate we should be expecting throughout the year? And then I've got a follow-up.

Sure. On an EPS basis, foreign exchange had a negative effect this quarter, decreasing our EPS by $0.015. You can refer to the sales details we discussed that illustrate this impact. I believe it is quite challenging, if not impossible, to forecast foreign exchange fluctuations due to various factors, including geopolitical issues. Therefore, we are currently assuming that foreign exchange rates remain consistent with what we experienced in Q1. Significant deviations from this assumption could affect our guidance, but as of now, we are not anticipating any changes.

Thanks, Stan. And I know you touched on it already, but as it relates to the growth strategy, I know it's still early on, but maybe what has worked well so far. And maybe what hasn't worked as well as you'd hoped. Could you give us a little color on that?

It's a good question. I'm not sure if anything really works exceptionally well beyond our plans in fact with we are off on our plans. Yes, of course, when you make an acquisition, sometimes the first two or three quarters are a little bit better and sometimes a little bit worse. But essentially the notion that we want to provide a complete line of products for implants just an oral surgeon and implants bone regeneration generally has worked quite well, advancing sales around the implant has worked well too, in particular advancing sales of equipment and other consumables. I would like to see us finding a way to provide a greater share of the wallet of oral surgeons. I would love to see us show the complete line to every other surgeon we haven't whether it's consumables, equipment, pharmaceuticals, med-surge, and different technology. The same with the ortho doctors; I would love to see our aligner program grow; it's early stage right now. The SLX has gained recognition with KOLs at a very small launch at this stage, low launch. We will launch our real product, which is an easier product to use to our GP customers through our U.S. sales force at our national sales meeting in a few months. I'd love to see that grow. But we are taking that step at a time. And I would say on the endodontic side, quite happy with the level of new product introductions; edge-endo, which is at the lower-end of the pricing point of endodontics, is doing quite well. And just to go back on the low-end of the low-priced implant side, our recently closed acquisition and the dentist seemed to be doing well, unlike to see us have a bigger position in the low-end pricing point of implants. I would say in general, we're quite happy with where we are. We've added tremendous talent in this area over the last five years. Specialists in the implant oral surgery area, we've got great expertise at the pace in bundling generation, we have terrific expertise in the whole orthodontic area and endodontic space. So overall, it's steady growth, and we'd like to see more advancements of the specialty products into the Henry Schein customer base, and more of the specialty product customers buying the general products from Henry Schein consumables and equipment. So it's a steady program that we've started advancing maybe a decade ago and accelerated in the last few years, and we are quite interested in adding to that platform from an integrated point of view, and we have the capital to do that.

Good morning, everyone. I have a couple of questions. First, regarding operating margins and foreign exchange movements, can you share how much the FX impacts affected the reported operating margins in the first quarter given the expansion? Additionally, concerning the restructuring, could you remind us how the benefits are distributed between COGS and SG&A? I'm not asking for specific numbers, but is there a significant skew towards one expense line compared to the other? Thank you.

Sure. Thanks, Steve. On your first question, the impact to our operating margin was very small, related to foreign exchange, because we remember both sales, COGS, and operating expenses were all converted at the same rate. So it's really just a mix issue that had some minor impact, but it really was not significant for us. Second question, trying to remember, just give me again the second question; I forgot.

Yeah, just on the restructuring, just categorically whether you get more benefit from COGS versus the SG&A line over time, basically.

Yes, sorry. Yeah, virtually all of the restructuring benefits is on the operating expense line. There's very little that we are getting on the COGS line. So in fact, I'm not sure there's any of this is showing up on the COGS line. So it's really all reducing our selling and general administrative expenses, reducing, and we did reduce some headcount, and we also eliminated some physical locations. So again, it's all on the operating expense line.

Got it, okay. Alright, thanks.

Just to kind of stay on that theme a little bit. Steve, I guess, can you tell us what was specific to 1Q in terms of the outperformance on the operating expense line that won't repeat, at least from a qualitative perspective?

Yes. So we've had some expenses that we were able to reduce, but the expenses again, we're not expecting the bulk of those expense savings to reoccur. There's a number of different categories here so tough really to isolate on one or two things. We're going to work hard to see if we can continue some of that expense reductions going forward, but at this point, again, we don't think those expenses and they really relate to some employee-related expenses. So we really think that the likelihood of them reoccurring is probably small at this point. So hopefully that clarifies.

No, that's helpful. I guess I'll stick with that. Thanks so much.

Hey guys, thanks for taking my call. Regarding the TSA's, I appreciate the information on the $100 million. How should we consider its distribution throughout the year?

I would think that it would be relative number; Q1 is a short quarter for both sales to Covetrus. We closed February 7. I would think that the sales are relatively even throughout the year against say for the short Q1. There are not really any products that have a huge seasonal impact. So it should be pretty even throughout the year, and we'll continue to do because while it wasn't that material for us in Q1 as the number gets bigger. We wanted to point that out so that when you look at our operating margins, which is a key metric, we can look at operating margins excluding that.

Could you provide more insight on the specific expenses? I'm curious about the scale, is it $2 million or $5 million? This would help us understand the financial trends for the year and assist us in our modeling.

It wasn't all connected to that. I would estimate that about half of the outperformance, which was a $0.04 beat, was due to this reduction in expenses that may not happen again, while the rest comes from various other factors. So, I would say that roughly half of the outperformance was related to that.

Thanks for squeezing me in. You mentioned that following IBS, there's a ramp up in orders and I'm wondering if you can help us pace that out a little bit. So how the discussions have been going since then? How much of that ramp comes in Q2 versus a little bit further on in the year? If you could give us some color on pacing. That would be helpful.

So Sarah, traditionally, since IBS is right at the end of the quarter, and traditionally IBS involves sales mostly equipment, and equipment acquired generally installation is nothing really shipped in the first quarter, then you start seeing it in the second quarter and ending in the third quarter. It's hard to get the timing between the second and the third right. But in general, it will be good to take a look at sales for the first, second and third in aggregate. I think you'll get a trend for how well the equipment market is doing in general. But I can say from Henry Schein point of view, we had a pretty good IBS, traditional imaging, and of course, CAD-CAM the scanning part, the VI part was very, very good, and I would expect that we will see good results in the second and third quarters in accordance with what has traditionally unfolded in an IBS year. So I give you more specifics but it’s very hard to predict.

I would add it's probably more in Q2 and less in Q3, but again, more than that, it's hard to predict at this time.

Thank you everyone for calling in, your interest. Let me reiterate how excited we are, Henry Schein, about our future. We believe that we have an outstanding strategic plan again for the next three years, which builds on the success of the last few strategic plans. We are focused on advancing our distribution business from the optimization of expenses and more particularly from advancing our customers with better services, supply chain services, digital ordering platform services, product offering capabilities, and then second, we are excited about what's unfolding at Henry Schein One, and the other value-added services. And third, we remain committed to advancing our Henry Schein brand strategy focused on the specialty areas. We still have a rather small market share so there's a lot of opportunity for us on the upside in the specialty areas too. So you take the three hybrid; we have good plans, we have very good management, well positioned on the best constantly fine-tuning engaged in our business day-to-day and a highly motivated team globally. So I look forward to expanding the business organically and inorganically in the quarters to come. So thank you for your interest. If you have any further questions, please contact Carolynne Borders in Investor Relations at 631-390-8105 and you can call Steven as well at the same number 631-843-5915. We look forward to speaking with you again at one of our upcoming investor conferences, including the Bank of America Conference on May 15, UBS May 20, Stifel on May 29, when we next report earnings in August. So thank you very much.