Henry Schein, Inc. (HSIC) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Henry Schein second quarter conference call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Carolynne Borders, Henry Schein's Vice President of Investor Relations. Please go ahead, Carolynne.

Thank you, operator, and my thanks to each of you who are joining us to discuss Henry Schein's second quarter results. With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements. As a result, the company's performance may differ from those expressed in or indicated by such forward-looking statements. Also, those forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings. The contents of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 6, 2013. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. [Operator Instructions] With that said, I would like to turn the call over to Stanley Bergman.

Good morning, and thank you, Carolynne, and thank you, everyone, for joining us. We are pleased to be reporting record sales results for the second quarter, and as an indicator of the continued success of our diversified strategy, each of our business units gained market share this quarter. This strong sales performance coupled with our ongoing expense control efforts has us on target for our full year financial plan. In fact, we are pleased that we were able to report raising the bottom of our 2013 financial guidance range by $0.05 per share. I'll provide some additional commentary on our performance in each of our business units in a moment but to just set the tone for the call, we really are pleased with the results of yet another very good quarter and the performance of each of our business units which, in the aggregate, have gained market share across the board in each of the markets that we're in. So thank you for calling in and now, let me ask Steven to review our quarterly financial results.

Okay. Thank you, Stan, and good morning to all. I am also very pleased to report overall solid results for the second quarter of 2013. As we begin, I'd like to point out that our prior year second quarter results included onetime restructuring costs of $3.4 million pretax or $0.03 per diluted share. Exhibit B of this morning's earnings news release reconciles GAAP and non-GAAP income and diluted EPS from continuing operations. Our net sales for the quarter ended June 29, 2013, was $2.4 billion, reflecting an 8.6% increase compared with the second quarter of 2012. This consisted of 8.7% growth in local currencies and a 0.1% decline related to foreign currency exchange. In local currencies, our internally generated sales increased by 4% and acquisition growth was 4.7%. Our sales growth and share gains were enhanced by the timing of 2 factors that we discussed when reporting our first quarter results. First, the timing of Easter and Passover holidays impacted our U.S. business and had a more pronounced impact in Europe and Canada since it effectively added one business day to the current calendar quarter compared with last year in those geographies. Second, the timing of the IDS trade show in Germany positively impacted our International Dental equipment sales. We estimate that these 2 factors combined added a little less than 1% to our overall sales growth for the quarter. You can note the details of sales growth that are contained in Exhibit A of our earnings news release. Our operating margin for the second quarter of 2013 was 7.4%, an increase by 18 basis points compared with the second quarter of 2012, and that excludes those restructuring costs in the prior year. When we also exclude the impact of current year acquisitions that were completed during the past 12 months, our Q2 operating margin expanded by 32 basis points. Operating expenses as a percentage of sales improved 54 basis points as we continue to control and leverage our expense structure. The operating expense improvement was partially offset by a decline in gross margin of 36 basis points due primarily to 3 factors: first, greater internal sales growth in the Animal Health business, which is lower margin; second, the impact of 2 Animal Health acquisitions in the international market -- they were C&M Vetlink and AUV Veterinary Services, which accounted for approximately $79 million in sales from the quarter; and third, we did have some product mix issues across all of our businesses. Our effective tax rate for the quarter was 31.4%, which is up slightly 0.2% versus the second quarter of 2012 and is in line with our guidance. We expect the overall effective tax rate for the rest of the year to remain in the 31% range. Our net income attributable to Henry Schein Inc. for the second quarter of 2013 was $108.4 million or $1.23 per diluted share. This represents increases of 8.1% and 10.8%, respectively, compared with the second quarter of 2012, again excluding those restructuring costs in the prior year. I'll also note that foreign currency exchange did not have any impact on our EPS for the quarter. I'll now provide some detail on our sales results for the second quarter. Our Global Dental sales for the second quarter of 2013 increased 6.2% to $1.3 billion. This consisted of 6% growth in local currencies and a 0.2% gain related to the foreign currency exchange fluctuations. In local currencies, internally generated sales increased 3.0%, and acquisition growth was similar at 3.0%. The 3% increase in internal growth in local currencies is comprised of 3.6% growth in North America and 1.9% growth in the international markets. I'll go through some details behind each of these figures. The 3.6% growth in North America included 4.2% growth in our dental consumable merchandise side of the business and 1.4% growth in our Dental equipment sales and service revenue. The 1.9% growth in International Dental market included a 1.3% decline in consumable merchandise and an 11.1% increase in Dental equipment sales and service revenue, which was of course enhanced by the IDS trade show. Our Global Animal Health sales were $666.3 million in the second quarter, which is an increase of 13.7%. This is comprised of 14.1% growth in local currencies and a 0.4% decline related to foreign currency exchange. In local currencies, our internally generated sales growth was 4.2% and acquisition growth, again, primarily related to C&M Vetlink and AUV Veterinary Services was 9.9%. Our 4.2% internal growth included 9.6% growth in the North American market and a 1.4% decline internationally. If we normalize our results to account for the switch from agency sales, our North American sales growth was approximately 4.2%. This sales growth was lower than Q1 due to a later start to the flea and tick season compared with last year where we had more unseasonably warm weather that allowed the flea and tick season to start earlier. However, I think it's important to note that we expect the sales growth for the balance of the year in North America to return to the high-single-digit levels on a normalized basis. We believe we gained further market share in this business unit, and this marks our sixth consecutive growth of overall double-digit sales growth. Our Global Medical sales were $387.9 million in the second quarter, an increase of 7.4% in local currencies, which consist of 6.2% internally generated and 1.2% acquisition growth. The 6.2% overall internal growth in local currencies included the same number, 6.2% growth in North America and a 5.6% growth in the international markets. Here, also, we believe we continue to gain market share in the North American segment of this business unit, and that accounts for more than 90% of the total revenues for Medical. Our Global Technology and Value-Added Service sales was $78 million in the quarter, which was an increase of 14.5%. This included 14.9% in local currencies and a 0.4% decline related to foreign currency exchange. In local currencies, our internally generated sales increased by 9.6%, and acquisitions contributed an additional 5.3% to our growth. That 9.6% internal growth in local currencies included 8.1% growth in North America and 18.4% growth International with particular strength in our electronic services recurring revenue, as well as overall software sales. During the quarter, we continue to repurchase our common stock in the open market. Specifically, we repurchased 840,000 shares during the quarter at an average price of just under $93 per share or approximately $78.1 million of cash. The impact for this repurchase on our second quarter results was not material. At the close of the second quarter, we had approximately $149 million remaining for future repurchases that were authorized by our board. If we take a look at some of the highlights of our balance sheet and cash flow, our operating cash flow for the quarter was very strong at $274.8 million, and that compares to $178.5 million in last year's second quarter. We continue to believe that we'll have strong operating cash flow for the balance of the year. Our accounts receivable days sales outstanding were 39.5 days in the current quarter, and that compares to 40 days in last year's quarter. Our inventory turns for the current quarter was 6.2 turns, and that compares to 6.5 turns in last year's quarter. It's important also to note that we no longer have any remaining inventory related to our forward buy-in with the medical device excise tax that we completed late last year. So inventory levels now have been reduced for that volume. Let me conclude my remarks by discussing our 2013 financial guidance. Due to the strength of our second quarter results, as well as the outlook for the second half of the year, we are raising the bottom end of our 2013 EPS guidance range, and we now expect the range to be $4.86 to $4.91, and this represents a growth rate of between 9% and 11% compared to 2012 results excluding those restructuring costs. This guidance also excludes 2 onetime items. The noncash charge of $0.03 per diluted share related to the debt refinancing of Henry Schein Animal Health, which was formerly known as Butler Schein Animal Health, as well as an estimated charge of between $0.13 and $0.15 per diluted share, which we expect to take in the third quarter related to divesting a noncontrolling interest in a dental wholesale distributor that we previously announced. Also, as always, our 2013 guidance is for current operations, as well as any completed or previously announced acquisitions but does not include the impact of any potential future acquisitions. Let me now turn the call back over to Stan.

Thank you, Steven. As I noted in my opening remarks, we're very pleased with our second quarter results. Quite solid across the board. We are seeing an overall stable environment among our U.S. customer base, slightly leaning in the positive direction, and I have confidence that we will continue or even improve somewhat on our sales over the coming quarters. Overseas, however, we are experiencing continued geographic weakness related to the macroeconomic factors, although there are strengths in certain markets such as Germany. Let me now provide some more specific observations on each of our business units, starting with the Global Dental business. Internal sales results in local currencies were particularly strong in the North American Dental consumable merchandise and International Dental equipment businesses as we experienced a typical benefit from the biennial IDS trade show. During June, we announced 2 developments in our Dental unit that are noteworthy. We did announce the introduction of a new product called Realine from Align Technology, which is an entry-level, clear aligner solution designed for relatively minor crowding and space issues that general practitioner dentists see in their practices every day. Realine is ideal for adults whose teeth have shifted from -- have shifted after adolescence orthodontic treatment, and we are now actively selling this product in the U.S. This agreement is Align's first exclusive distribution partnership in North America for a clear aligner product, and we are delighted to be partnering with them on this innovation and, quite actually, innovative solution. It's pretty early to tell how this will be received by the marketplace, but our sales force is reporting very good interest in the product offering of the Realine product, and we are quite enthusiastic about this launch, which also was as I -- which actually I didn't report to the shareholders before -- was actually well received at our international sales meeting. Also at our National Sales Meeting in June, we unveiled the all-new E4D NEVO Scanner and Design Center. The NEVO Scanner technology represents a new level of precision, proficiency and productivity compared with prior D4D systems and is based upon years of experience with powder-free and, as you know, D4D has been powder-free right from the beginning almost, image capture in the intraoral environment. This is the first scanner to use E4D's patent pending blue laser technology, and it offers dentists the potential to further improve the quality, fit and predictability of restorations. It also affords the patient a great outcome and strengthens the practitioners' clinical offering. I'm delighted to report that we are receiving extremely positive feedback from dental professions -- professionals, in other words, key opinion leaders, in the United States who are using the system from the very first time. And we are quite optimistic with this, what we view as breakthrough technology in the CAD/CAM scanning field. Let me now spend a few minutes on our Global Animal Health business, which notched further market share gains, we believe, during the quarter here in North America and in -- abroad. The North American growth was nearly 10%, all internal of course, and in the companion animal field primarily. International growth in local currency was approximately 19%, which was driven by acquisitions, while international internal growth declined slightly, primarily due to the macroeconomic environment in most of the countries in which we operate in. That's outside the U.S. You will recall that early in 2012, we acquired Veterinary Instrumentation, which is the leading supplier of surgical instruments and orthopedic devices to veterinary surgeons in the United Kingdom. What attracted us to this company was not only its leadership position in the U.K. but also the opportunity to bring their high-quality products to other geographies. In May, we announced the introduction of the full-service Veterinary Instrumentation product line in the United States, and we're expanding the veterinary instrument offering, therefore, from the U.K. into the United States to a greater extent than in the past, with positive results, I might add. We are committed to offering the best products and services to our customers here and so the veterinary instrument line fits in with that goal, and we're excited to bring these proprietary products to our domestic animal health customers, therefore. So generally, quite happy with the performance of our Global Animal Health business. In the United States, we believe we continue to gain market share; likewise in Europe. Having said that, in Europe, the markets are, of course, are not growing. In the Global Medical arena, we also believe we further gained domestic market share in this business unit with strong sales growth in Integrated Delivery Networks, that's the IDNs, urgent care settings and ambulatory surgical centers. We have particularly good competency and strength to service these markets in the alternate care space. Our strategy is to focus on these types of larger customers who are continuing to grow their share of the overall foot traffic in the medical arena, and we continue to show positive results of the strategy that we have been following for the past half dozen years or so. So now let's look at the Global Technology and the Value-Added Services businesses. As Steven mentioned, we posted particularly strong sales growth in electronic services -- reoccurring revenues, as well as sales of software products. We are also delighted to report another quarter of double-digit growth in the international software market as well. We believe that our products are very well positioned to help practitioners who are faced with challenging economic times, and the products can, of course, help them increase the profitability of their practices while, of course, increasing the quality of care. And so we believe we're well positioned to help and, therefore, showing very good growth in our international software business, as well, I might add, in our international financial services business. Last September, we acquired a majority interest in the Canadian dental software company, The Exan Group. Exan products have strong penetration among U.S. and Canadian dental schools and are also used by Canadian dentists. About 2 months ago, we announced the release of a new French language version of the Power Practice Software system, which previously was available only in English, through Exan. The Power Practice was developed in Canada by Exan, by their local development team. And as the full -- the first full practice management software system in French, designed for French Canadian dental practices, this product has also been well received in the marketplace. So there's a lot going on at Henry Schein. So I think it's best for me to now allow for the rest of the time of this call to respond to questions that analysts and shareholders may have. And so, operator, perhaps it's best now to ask for Q&A.

Amy, could we please start the Q&A?

[Operator Instructions] Your first question is from Robert Jones of Goldman Sachs.

So just to start on North American Dental. You saw some nice growth there, a nice step forward in the quarter, and you're specifically calling out consumables. Can you give us a sense for what you saw in the quarter, as far as foot traffic, versus price increases, versus share gains, just trying to get a sense of what was driving the growth in the quarter in North American Dental?

Well, so the consumable growth, remember we did have a little bit of tailwind for the quarter related to the timing of the holidays. But even without that, the consumable growth was over 3%. So we think that, for us, there's probably about 2/3 of that, that is pricing and 1/3 that's additional units. So we think we are gaining market share since we think that the overall market units is relatively flat. So we feel good that we're gaining market share. Equipment, I think while equipment was a little over 1% of sales growth, I think it's important to note that equipment, we had a very strong Q2 last year with almost 8% sales growth, so up against a more difficult comparable. But we feel good about equipment growth in the U.S. market going forward. Our backlog report shows a nice healthy increase, both domestically, as well as internationally, so both of those are good indicators. So overall, we feel like that the overall U.S. dental market has the potential to show some additional improvement. As Stanley said, that the market is stable to slightly positive in foot traffic, so we believe that, that's true. And we're hopeful that for the rest of the year, we'll continue to show those trends.

Just to amplify a little bit on what Steven said. Of course, I don't think any particular group of weeks represents a trend necessarily. But our sense, and this is anecdotal, is that the U.S. dental market traffic into GPs is getting a little bit stronger and that there's a lot more optimism amongst GPs in general -- there's some parts of the country, where this may not be the case -- there's a trend towards a little bit more optimism than perhaps some months ago.

Understood. And actually just want to get one in on Animal Health. You mentioned your expectations for Animal Health in North America in the back half. But the internal growth in the International Animal Health business is a bit disappointing. Can you talk about the trends you're seeing in the major markets overseas in vet? And I guess, just as it relates to that market -- obviously, inter-quarter, we saw a fairly significant acquisition announced from your largest U.S. competitor, just wondering if you would comment on the risks or trends that we should be thinking about in that space.

Yes. The overall trends are a little bit different for the U.S., whereas the U.S. is stable to growing, I would say international is stable in the markets that we're in, to leaning slightly down. The U.K. market that you referenced is probably leaning in the slightly down column, and Europe is on balance, probably stable to slightly down. We do participate a little bit more in the large animal market, particularly in the Netherlands, and that market, the large animal, is not as strong as it's been in the past. As it relates to Australia and New Zealand, I think we continue to gain market share but the -- and there we're also in the large animal arena, the market is not as strong as it's been in the past. So I would say that, on balance, we feel that the markets that we're in, in the aggregate, are gaining market share slightly, but the markets are stable to slightly down. As it relates to a competitor that entered into the U.K. market, I would say that we have competitors, strong competitors in every market throughout the world. We're a good #2 player and have been a good #2 player in the U.K. animal health market for a while, several years. We're very happy with the progress of that business, have an outstanding stable management team that's been with us for a while. We've gained market share, we've improved on the efficiency of the business, we've continued to invest in that business and are very comfortable that we will continue to grow our market share in the U.K. as well. Let me add that we're also making good progress on our Practice Management software in the animal health arena, and we believe that our logistics plus our value-added software offering will continue to help us advance our market share, all in unison with some high margin products that we're adding in different markets throughout the world, such as the vet instruments offering.

Your next question is from Kevin Ellich with Piper Jaffray.

I guess I wanted to start off with the International Dental equipment growth. Obviously, saw a pretty good impact from IDS, was that pretty much in line with what you expected, going into the show? And then, how much follow-through have you seen into Q3?

I would say the follow-through after the show was pretty good. The actual orders at the show were impacted to some extent, by -- I think it was an airport strike on the Friday and there was snow. So if you lump together the orders that were received immediately before the show and after the show, we are quite happy with our performance in Germany, and actually believe we continue to gain market share in equipment field in Germany amongst the key manufacturers of dental equipment in Germany. So I think, on balance, it was a very good show and has given us good momentum going into the balance of the year. But the actual orders taken at the show were somewhat challenged because a number of our customers could not get in to deliver the orders. But we didn't miss a beat really, we picked up the orders afterwards and, overall, we're quite happy with our German business in general.

Yes. But anyway, going back to -- I've got a quick question for you, Steve, minority interest, or net income attributable to minority holders, was a little bit higher than what we were looking for. Just wondering what's caused -- it that really just from the acquisitions and is this kind of a run rate we should be looking at on a go-forward basis?

Yes. I think the run rate -- first of all, that number being higher is a very good indicator, because that means the underlying business units that we have a controlling interest on, those -- the profitability of them is increasing, and that backs out the minority share of profits that we do not own. So I do think the run rate that we're seeing now, we should look at more consistently, again as adjusted for seasonality. The biggest driver really was the U.S. Animal Health business that had very strong profitability growth, as well as we did increase our ownership during the year slightly. So that was the biggest driver. I just want to also just remark on the last question. I think it's important on the Dental equipment sales internationally to note that, going forward, we feel bullish about international equipment sales because of the backlog report, that's up slightly at the end of the quarter, even despite the IDS trade show, and that's a very strong indicator.

Your next question is from Mike Cherny of ISI.

Similar to Bob's question on Dental, I want to dive into the medical a bit. You guys have continued to perform well, from an organic growth perspective, particularly against what looks like a backdrop of challenging utilization. Can you maybe break down that what you see as some of the differences? I know, Stan, you talked about focus being on the IDNs, but in terms of what you guys are seeing in your book of business, on foot traffic versus price versus share gain, particularly given there's been some disruption recently in the competitive landscape?

Yes. It's very, very hard to gauge foot traffic because the market is not constant any longer. You see a shift from smaller practices to larger practices, and a shift from both smaller and larger practices to acquisition by, to some extent, consolidators, but more importantly, ownership by IDNs in one form or another. There's just no data available. What we can report is that our business in the smaller accounts is not doing well. It's not doing badly but you can see that this area is definitely not where the growth is coming from. Having said that, the growth is really coming from these consolidators, whether they are IDNs or they are group practices merging with other group practices, or group practices acquiring small practices. And there's many, many different ways in which this is taking place. And that part of the business is particularly strong. One should never count one's eggs before they are hatched, but we think that we are on a very good position to continue to gain market share amongst this emerging sector, the area that we refer to as our Health Care Services group, and this is a group we put together about half a dozen years ago, and it's gaining real market share growth. I don't believe that there's any price inflation, really. I mean there's something perhaps here relative to the medical device tax, some of that's been passed on. Although in the aggregate, in our $1.5 billion business or so, I don't believe that's, that material, it's basis points. But overall, the growth that we're experiencing is from market share growth. Of course, there is some growth coming out of these urgi centers and some of the other specialty products that we've introduced over the last few years. I think we're doing well in equipment, particularly diagnostic equipment. But overall, its market share growth in units that is driving our sales here. And although it's very hard to predict every quarter going forward, we remain rather bullish on our continued growth. I don't think particular -- any particular acquisition is driving our growth in a positive direction or a negative direction. The market is consolidating and the larger players will, of course, do well because in the end, this market is driven by the capacity to deliver on value-added services to these larger customers. And for that, you need to invest a lot of money in software and other services and, I think, we've made a lot of investment already and will continue to make that investment, and those that make those investments or have the capacity to make those investments will do well.

Great. And then one other follow-up on IDS. Obviously, strong growth there for the quarter. If you think about within those markets, are there any specific product areas that were selling particularly well versus others? And obviously, Sirona, who you're partnered with over there, had a very large showing in terms of new product introductions. But any other areas of equipment, in particular, that have garnered significant interest coming off the back of IDS and anything where maybe you expected in terms of a product category to be a little stronger and it came in less than your expectations?

I don't think it's that finely -- the categories are not that finely granular that I could really comment on. Of course, equipment is important to us but we have a business that's heading towards $10 billion, $9.5 billion, and the impact of IDS per se on the whole of Henry Schein is not that pronounced that we would actually look at specific categories. And Steven will be happy to talk to our equipment people and get the details for you. But I would say, IDS was good generally for CAD/CAM imaging and even the unit sales. And I can't tell you whether there's a particular unit sale that was down or less -- was not -- didn't grow as much as our expectations or not -- that's a bit too fine for this call. What I can tell you is that, generally, our manufacturers did well at IDS, across the board. There was a good showing of new equipment but I would say also that nothing that was completely profound. I think the showing of new equipment was more or less in line with what was expected. Our sales force was ready for the new equipment and was able to process interest of customers and turn that into sales. So I don't think there was any major disappointment or major really positive surprise from the show. It was a good show. And was in line with what we expected, more or less, other than the weather, which resulted in us having to pick up orders and close the orders after the show, but I don't think that will impact, really, shipments in any particular way.

The next question is from John Kreger of William Blair. John Kreger - William Blair & Company L.L.C., Research Division: Stan, a question for you, kind of along the mix topic. Can you give us a sense across your 3 main segments, the kind of momentum you're seeing with private label versus branded products? And is that influencing mix at all?

I don't -- let me just think about it. On Dental, I don't believe private brand is having a material impact in any way. There may be markets that it's going up, there's certainly other markets where the branded manufacturers are responding -- by the way, you should know that, generally, in Dental, we have our biggest market share in private brand. We are essentially a branded company, and where we have a branded option, we will kick off with that. We only use the private brand where we have price competition, and this tends to be on the less technique-sensitive products and more towards the commodity and infection control commodity-type products. So I don't think there's much swing. I mean there are a couple of markets I can think of in Europe right now, where we were particularly under-penetrated in this area and others were perhaps more focused on this and we've advanced. But overall, it's quite stable. In the Animal Health area, it's a relatively small amount of the business because the business is predominantly in the branded pharmaceutical area from a sales point of view, and in the Pet Food area, and those are essentially branded products. We do sell some generics. We are increasing our sales in absolute terms on things like surgical products and instruments, et cetera, but it's not material as a percent of this almost -- what is it? $2 billion business, or more than $2 billion business, I don't think it's material. On the medical side, I would have to say that, it is growing. And it's growing because of the price pressure and it's growing, I would say, with the medsurg products in particular; we don't really sell private brand equipment. It's some small equipment and maybe private brand, we do not really have private brand reagents for machines, that's all branded. There's some private brand quick diagnostic type stuff and I don't know if that's growing, it's probably stable. And on generics, yes, on the injectable side, it's important. Although there's been a shortage of injectables, it slightly eased up. And of course, I don't know how you would classify a flu vaccine, but if you classified it as an injectable -- as a generic, of course, that is growing. And although there is a branded flu vaccine that's coming to market now, I don't think it will have a material impact on the number of doses, at least not for the foreseeable future. John Kreger - William Blair & Company L.L.C., Research Division: Great, thanks. A quick follow-up about your -- across your Global Dental equipment line. Within CAD/CAM and digital scanning, are you seeing more momentum with the full chairside systems or with the scanner-only option at this point?

I think the scanner-only option is relatively small, although will gain momentum. I think we're really at the early stages of this whole CAD/CAM recognition by dentists. I think there's a lot of curiosity, and I think the majority, of course, of dentists that are buying these CAD/CAMs today are buying a chairside unit. Having said that, I'd think the scanners -- there are many scanners out there, and the market will grow, it will develop. I think we're in a stage today where dentists are looking at all the options out there and I think the variety of scanners that are in the marketplace will just draw attention to this marketplace and make dentists more comparable to invest in this space. But I would say that from a dentist's point of view, at least from my gut reaction, I don't have any scientific data right in front of me, the majority of dentists that are investing in the space are today investing in the area of chairside. The whole role of the laboratory as it relates to CAD/CAM is fascinating and that's emerging rapidly with many, many different players and lots and lots of different solutions. Of course, Henry Schein's goal is to be the #1 place for dentists to turn to and for laboratories to turn to, to understand the changes and be the trusted adviser in leading dentist/dental labs in the area of digital dentistry from a prosthetics point of view. But we're in early stage, I think, still, with lots of excitement of us.

The next question is from Brandon Couillard of Jefferies.

Stanley, just curious if you care to give us your expectations around flu dose volume shipments and AFPs for the back half of the year and whether we should expect that to be more weighted between the third or fourth quarter, just on the back half.

Well, as it relates to expectations, at this point in time, our internal numbers, as -- I think, I don't think this is anything new, otherwise we would've changed things and we would've announced it. Very similar to last year and I don't think we're looking for much change either in volume or pricing. Of course, things could change. And it's really virtually impossible to give you the shipping dates because, as it happens, you know, the fine line in shipment between September and October is very hard to predict. So I don't think it's material in relationship to Henry Schein's performance because we will always point out the aggregate of flu vaccine shipments in doses and impact on earnings per share for the entire year, and we will make that very clear in the third quarter conference call. So I don't think it will have -- it should not an impact on our earnings per share for the year, at least from what we're seeing right now and we're not aware of any manufacturer that has difficulty.

And just to remind people, we sold about 8.6 million doses last year, so again, as Stanley just said, we do expect a similar volume this year and, again, between Q3 and Q4, from our perspective, it's just really not possible to give, at this time, any accurate projections. But we'll be totally transparent on the Q3 conference call and compare our Q3 results this year and last year. And the good part is that by the time we announce Q3 results, we'll be well into selling into Q4, so we'll be able to give indications on full year, also.

And then one more, Stan. Acquisition activities have been fairly muted year-to-date. Just curious, how would you characterize the acquisition pipeline and where you see the greatest opportunities sort of mid-term?

Yes. I mean, the pipeline continues to be as strong as ever. Muted is not reflective of what's likely to happen. Deals happen when they are ready to happen. We have more in our pipeline than we have the capacity to close, not from a financial point of view. In fact, we think our balance sheet is a little bit under-leveraged at this point in time. But more from a capacity to actually do the deals and absorb them from an internal point of view. But we are hopeful, but no promises that, in the second half of the year, we will be able to close on some deals that will bring us accretion. Not necessarily this year, of course, because of the way of the accounting treatment, but that will give us momentum into next year and the year after. So we continue to be quite optimistic. We're not going out of the dental medical vet space. Our consumables equipment and software will remain within that space. But we believe there's lots of opportunity and are hopeful that we will close some deals in the not-too-distant future. But of course, we can't guarantee until the deals are done.

The next question is from David Larsen of Leerink Swann.

Can you talk about what your preliminary expectations are for 2014 in health reform, and the decline in a number of uninsured lives, any thoughts around that?

Yes. It's a good question because we spend a lot of time talking to people that are in the health care delivery world and it's still rather unclear. What is clear is that health care reform is here to stay. At least the notion of insuring people that were not insured in the past and the implications of that relative to visiting -- having access to a physician rather than only being to go to the emergency room of a hospital should somebody be sick. So we see a lot more wellness programs emerging. And a lot more preventive activity. And that takes place essentially in the physician office. And we also see a marked movement from the hospital where procedures are taking place to the alternate care site for procedures. The doctor's office, the small ASC and the large ASC. And our focus is essentially on the doctor's office and the smaller ASCs. Now when it comes to the doctor’s office, of course, that can be small groups and large groups. But our focus is essentially on the smaller ASCs although we do have some larger ASCs. Now a lot of is going to happen, we think, in 2014 and more in 2015. Exactly when this is going to transform -- translate into dollars, it's hard to tell. But we are doing well today without this movement resulting from increased covered lives and only expect -- and expect that there will only be more to follow as anywhere from 30-plus million Americans have access to a physician from -- in a physician office due to emphasis on wellness and prevention, and that's very exciting for our medical business. So we believe we just need to continue advancing our programs in the medical arena, and we will be the beneficiary of this trend in the years to come. But hard to pinpoint a date. I think, for sure, by 2015, we will have a nice benefit, but I think it will grow between now and then. And also, I think insurance companies, in anticipation of some of the changes, are driving activity to the alternate care site with a focus on prevention and a focus on wellness. All of this, I think, bodes well for this part of our business.

Okay, thanks. And just one more follow-up. Steve, can you just touch on SG&A? I mean, it looks like costs were managed very well in the quarter. Is this a pretty good run rate going forward, do you think?

Yes. Again, subject to seasonality and acquisition activity, I would say, yes. And it's by design, there's a continued focus on managing expenses tightly. We know that the markets that we're in are growing slower than historic norms, so we want to continue to do that. So I think it is something that we take great pride on and will continue to do going forward.

Your next question comes from Steven Valiquette from UBS.

So just 2 quick ones for me. First, on the North American Animal Health for the back half of the year, will the agency sales impact on the reported results be about the same as what it was in the second quarter? I just kind of forgot when you anniversary some of that.

Yes. So again, we have been getting, for a few quarters now, what we call the normalized sales growth. So it adjusts for any shifts of agency to traditional sales or vice versa. And as we said in the prepared remarks, we do believe that for the balance of the year, that normalized sales growth will be in the high-single digits. So it'll be back to where it was in Q1. We had this anomaly in Q2 because of a very strong flea and tick season last year. And I think that roughly speaking, the delta between GAAP reported sales and normalized sales will stay consistent for the balance of the year.

Okay. And the other quick one, you guys gave us some pretty good color around the International Dental equipment, but for the back half of the year, it seems you also have some pretty easy comps there versus the back half of '12. So I think, at a minimum, you should be able to sustain at least positive organic growth in that line in the back of the year, as opposed to reverting back to negative territory. Is that a fairly safe assumption just based on your comments, without getting too granular?

Well, I never found a quarter in our -- my 30 years with Henry Schein that's been easy, but I appreciate the positive tone of your question. Having said that, I think our book right now, as of this moment -- of course, I can't turn this statement into any kind of calculation, I think our book of business at this point on the equipment side generally is pretty good and we are optimistic. But we have, ahead of us, the big dental show in France in November. The French economy, it's hard to tell because it's summer now and not much activity, was steady going into the third quarter. But there's very little prediction and no comfort that the economy will continue to be this way. I think Germany is stable and the U.K. is stable. And so -- and then we got Australia where we have some real challenges. About $1 billion was taken out of reimbursement by the government from a $7 billion reimbursement package. So I think it's better for us to be conservative when we prepare our internal projections. So I think we are leaning towards positive growth, but I think it's hard to confirm one way or the other. And I don't think it would be wise for us to predict where the third and fourth quarter will end up with from an equipment point of view in Europe given the volatility of those economies. But we remain very optimistic and, generally, our international businesses, whether they are dental, medical and/or vet, have really good management teams and they're always outstanding.

Your next question comes from Glen Santangelo of Crédit Suisse.

It's actually Diego filling in for Glen, and I was just kind of wondering if you can help us out, thinking about the operating margins in the distribution businesses, which is the tech and value-added services line, and maybe how that came in versus your expectations?

Sure. Overall, again, operating margins, were up 18 basis points. Let me just pull out some of the detail between distribution as you're asking. Just give me one second to do that. As I'm pulling it out, I'll just comment that overall, we think that operating margin expansion is an important goal that we continue to believe we can get margin expansion. We always look at operating margins, excluding acquisitions or current year acquisitions, because if we buy a high or low-margin business, we kind of look at the same-store operating margin, excluding that acquisition. And for the quarter, we did show, on that same basis, excluding acquisitions, 32 basis points of operating margin expansion, x acquisitions, we got margin expansion, both in the health care distribution segment and in the technology segments. Including acquisitions though, the technology segment declined slightly, because we did buy some companies that while they have overall good margins in the teens or 20% range, they are lower than our overall technology margins. So again, because of that current year acquisition activity, it did show on a reported basis a little bit of decline. But overall, I think it's good that we increased on both components, again, x acquisitions on a same-store basis.

We do have time for one more question, and that question is from Jeff Johnson of Robert Baird. Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: So 2 just quick follow-ups. One, I tend to think about consumables on the dental side as kind of your leading indicator for equipment, and consumables are getting better, then dentists probably a few quarters later are going to start buying equipment again. So in North America, it looks like we're starting to move the right direction there. But 2 quarters in a row now of the international consumables business being negative so, Stanley, I heard some cautionary comments from you on the international equipment side. But is that kind of what's leading to some of the caution there on the international side and conversely, on the North American side? Is that what's giving you some confidence in the equipment market there?

Well, I can't remember the exact quarter, but my guess is 4 or 5 quarters ago, we were quite cautionary on the U.S. market, and I think we can quite safely say, as I'm making this statement, this very second, that we tend to be a little bit more optimistic, or quite a bit more optimistic, on the U.S. and I might add, the Canadian market. So that kind of sentiment or that kind of gut, and to be sure, we're talking about a couple of percentage, either away, we're not talking about massive swings one way or the other. It's that kind of sentiment that we're a little bit concerned with in Europe. Look, Germany is stable. We've had good IDS. We think, in the wake of that, there will be some business to be had in the third and fourth quarter. Having said that, Italy went through a very traumatic period. The Italian market melted. The dental market went back significantly, although we gained a lot of market share because we have capital and I think a great business in Italy, the only national consumable and equipment business. I think, although business is good-okay, in France, I think, at least if you read the newspapers, you've got to believe that the French economy is going to have some bumps along the way, although we haven't seen it dramatically from our point of view. The U.K. is a bifurcated economy. If you go into London, things are okay; if you go outside of London, some of the big cities, there are challenges. But on balance, I think we will continue to gain market share. But gaining market share is, in itself, is not as good as gaining market share within a growing market. The Netherlands had some economic challenges as it related to reimbursement. I think in a quarter or 2, we should see some positive growth as that market stabilizes. And then Australia, we had a very, very good finish to their fiscal year, which is the second quarter. In fact, we've seen some reimbursement changes, very rare do we see reimbursement changes impacting our dental business. But we have seen some reimbursement changes in Australia, and we're heading into an election. There's optimism that once the election is over, the economy will get better, I was just there the other day. And so, the rest of the world is not that material. Spain, yes, the comps are much lower than they were because the economy collapsed some time ago. So we're off lower comps. So I think it is only prudent for us to be conservative on European performance, from an equipment point of view, although consumables seem to be chugging along okay. So I just think we should be conservative and that's what I believe Steven has baked into his budgets and guidance, et cetera. But the business is in solid state. I believe that the European economy will get better at some point and we will, at that point, be very well positioned to do even better, because I think a lot of our competitors are weakened right now, and so I think -- they're weakened and we're investing in our European businesses. So I remain optimistic about our International strategy. I expect us to make acquisitions globally, no problems. And I still think our International business is likely to be closer to half in the next few years, than it is to the 35% it is today. And it will be profitable business. So, I'm sorry not to give you a perfect answer but that's the thinking right now. It's better to be a little cloudy and therefore, [indiscernible]. Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: Yes. No, that's helpful, Stanley. And Steve, just a clarifying question for you on the North American Dental equipment business. Just any color you can provide on high tech versus basic in the quarter?

It was interesting because typically high tech leads for us. This quarter we saw actually very strong growth on traditional equipments. One of the things I think that is a reason, is a little bit of an anomaly this quarter because I think the people are very excited about the new NEVO Scanner for the E4D product. And I think that, as that product comes to market in, I guess, late Q3, I think people are waiting for the introduction of the new product. So I think that's also a good indicator, Jeff, because, as you know, traditional equipment, I think, is where people tend to, when they're being conservative, pull back on. And the fact that we saw good growth there, I think was very interesting. And I do agree with your earlier comments that the uptick in U.S. consumable merchandise, potentially, is an indicator of equipment sales growth going forward.

So I think, Carolynne, we'd like to end at this point. Thank you very much for calling in. Thank you for your interest. We feel very good about where Henry Schein is. The morale in the company's good. Each of our businesses have their goals and, on balance, are delivering on those goals. Yes, there are some businesses that are doing better and some that are not doing as best they can, but it's -- as best we expect them to do, actually. And we have a pretty diverse portfolio, all focused on the office-based practitioner, dental, medical, animal health, and these are great markets. Preventative care is growing and baby boomers are driving business in our customers' offices. Technology is exciting, lots and lots of technology to be sold to improve efficiency of the practice, improve quality of care. There's a recognition that good oral care is good for health care. There's a recognition that preventative care is important and the health care reform is going to support that recognition. So we're very, very enthusiastic, optimistic. Our management team is in good shape. We've added, and we continue to add, to the management team, and our 3 business units, Dental, Medical, Vet, our global business units, are all fully organized in this global vertical, working with our horizontal global supply and services, the team. And so I would say, Henry Schein is in good shape right now, and we're enthusiastic about the rest of the year and working -- will soon start feverishly working on our budget for 2014 and look forward to our call in 90 days. Thank you very much. If you have questions, please feel free to call Carolynne at, what is your extension, Carolynne?

8105. 390-8105.

And Steven at 5915. And that's (631) 843-5915. And of course, you're also welcome to send an email. Thank you very much and have a good rest of the summer.

Thank you for participating in today's teleconference. At this time, you may all disconnect.