Good morning, ladies and gentlemen, and welcome to the Henry Schein Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [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, Ray, and thanks to each of you for joining us to discuss Henry Schein's results for the 2018 second 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 cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analysis and estimates. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 6, 2018. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Please limit yourself to a single question and a follow-up during Q&A to allow as many listeners as possible to ask a question within the one hour we have allotted. With that said, I would like to turn the call over to Stanley Bergman.

Thank you, Carolynne. Good morning everyone, and thank you for joining us today. We are quite pleased with our results for the second quarter, which reflects solid revenue growth in general healthy end markets, as well as our continued success in gaining market share in all of our business groups. We are in early stages of executing on our new strategic plan for 2018 to 2020. Yet we're already making solid strides, and expanding our offering of innovative solutions, and extending our value proposition for our customers. We are indeed excited about the potential for our new dental technology joint venture Henry Schein won, which closed on July 1. This joint venture was created to deliver integrated dental technology that combines leading practice management, marketing and patient engagement solutions into one connected management system. Our medical business remains highly relevant, as of course, reflected by our continuous and sustained growth in sales and market share. We are on track with - prepared for the plan you know [ph] of our Global Animal Health business with Vets First Choice, and a combination with Vets First Choice, which will create a new publicly-traded company to be named Vets First Corp. We believe this transaction will unlock shareholder value for Henry Schein shareholders, as Vets First Corp will be well-positioned to achieve a premium market evaluation. In addition, of course, we believe Henry Schein will continue to drive further growth in our leadership positions in our dental and medical businesses as a result of our sharp focus, and of course, increased investment of resources. We are focused on the development of practice management and clinical solutions that are highly relevant to our customers, and we have been successful as a result of our commitment to a high-touch value-added approach, which has advanced our…

Okay. Thank you, Stanley, and good morning to all. As we begin, I would like to point out that I will be discussing our results, both on a GAAP basis and also on a non-GAAP basis. Our Q2 2018 non-GAAP results exclude restructuring costs of $14.9 million pre-tax or $0.07 per diluted share as well as transaction cost related to the planned Animal Health spin-off of $7.6 million pre-tax or $0.05 per diluted share. Also, our Q2 2017 non-GAAP results exclude a litigation settlement expense of approximately of $5.3 million pre-tax or $0.02 per diluted share. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business and able to comparison the financial results between periods, where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating 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. For reconciliation, see Exhibit B in this morning's earnings release as well as on the Investor Relations section of our Web site. So, now turning to our results, net sales for the quarter ended June 30, 2018 were $3.3 billion, reflecting 8.7% increase compared with the second quarter of 2017 with internally-generated sales growth in local currencies of 4.8%. When also excluding the impact of certain products switching between agency sales and direct sales, which impacts both our animal health and to a lesser extent our technology businesses in North America, our normalized internal sales growth in local currencies were 6.1%. You could also see the details of our sales growth on Exhibit A of our earnings news release. Operating margin for the second quarter…

Thank you very much Steven. Let's review some business highlights from our second quarter 2018 results. In our general business, we of course are pleased with our 4.7% internal sales growth in local currencies, in our North American general consumer merchandise business. This is the highest quality growth rate since the fourth quarter of 2015. This growth in part reflects a favorable comparison versus the second quarter of 2017. We continue to believe the end market is stable, and we have benefited from market share gains. North America dental equipment internal sales in local currencies grew by 6.2%. General equipment sales growth was solid with a number of our key manufacturing partners in the second quarter of 2018, including Teva, Linmark, and Adec. With respect to dental equipment sales in North America, we continue to make good progress in the second quarter, and have been pleased with the overall product line ramp in the U.S. as part of our strategy to offer our customers a wide selection of choices to meet each of the nation's unique practice needs. Looking at our equipment categories, local internal North American CAD/CAM sales were up 35%. Overall, North American high tech equipment sales were relatively flat, since strong CAD/CAM sales growth was offset by soft digital X-Ray sales, imaging sales, we believe the soft digital imaging sales are primarily due to higher market penetration. Although we expect this market still be a very solid market in the years to come. On a global basis in local currencies, CAD/CAM sales grew by more than 28% that's on a global basis and our dental implants business grew at approximately 5% on an organic basis. Looking at international business, we believe the end markets in Europe including Germany, our largest European dental market are stable. We are…

Ray, let's go ahead and start the Q&A.

[Operator Instructions] Your first question comes from the line of Jeff Johnson from Baird. Your line is open. Please ask your question.

Thank you. Good morning, guys, and congratulations on the nice improvement in the dental numbers. Steve, on that dental point, I guess my question is on the general consumable side, any further color you can provide as far as did market strengthened during the quarter, was there any change in DSO versus your private practice business, and maybe any commentary around general consumables versus some of the specialty stuff?

Sure. So I don't think the market really changed in any significant way during the quarter. We did take more market share I believe. To be fair, we did have a little bit of an easier comparable last year, but going forward, even post Q2, we did see continued strong revenue growth in the consumable merchandize in North America. So we're executing well. Dental specialties did help a bit, because they were in the mid to high single-digit growth rates. So it was growing a little bit faster than the general consumables. But then again overall I think market is very stable and we are really executing well and taking some market share.

All right. That's helpful. And then as follow-up question, just on the minority interest, you bought out I think the remainder of the vet minority interest shares in a couple of different businesses, when was that complete? Is the minority interest line we thought about $6 million reduction, is that a fair way to think about going forward? And the corollary on that, if it is it looks to me like embedded in your guidance then is that margins may be down a bit still in the second-half of this year. We were thinking they might be closer to flat. So can you maybe help us connect kind of the moving parts there on buying out those minority interests and how to think about margin over the back-half of this year? Thanks.

Sure. The benefit from minority interest will be a bit greater in the second-half because it's basically composed of two areas. The first is the Henry Schein Animal Health buyout of the minority interest, which is only a partial quarter benefit because we did it during Q2. I think it's sometime in the April or early May timeframe we did it. We completed it. So, you'll get a full-quarter benefit in Q3 and Q4. And the second piece of it was related to what we did at the beginning of this year, we bought out BioHorizons. So that is the full-quarter benefit in Q2. But we do feel like we can continue to get that benefit again going forward on a full quarterly basis. Margins have a lot of different moving parts. So we may be a little bit lighter than we originally planned on operating margins. But we still feel good with the overall business and the overall growth. And that's why we are raising the bottom end of our guidance.

Thank you.

You are welcome.

Thank you. Your next question comes from the line of Ross Muken from Evercore ISI. Your line is open.

Good morning, guys. So maybe on just pricing environment in general, I mean how would you kind of characterize it against the separate sub groups of sort consumables specialty consumables, instrumentation on the dental side? And any notable differences U.S. versus international? Just teasing back to kind of the margin commentary?

I think, Ross, it's fair to say that pricing pressures are there to some extent. Of course, the internet provides a vehicle for an exchange of information. I don't think results involve orders going to online retail as per se. But there is a little bit more openness on pricing. I wouldn't say it's material. But what this does to save time is offer us an opportunity to talk to the customer where price is important in our corporate and other competitive offerings of certain manufacturers. Certain manufacturers are responding generally to the competitive pricing. And this is both in dental and medical. I wouldn't say it's that much in the pharma side of the animal health. But in medical and dental, I think the manufacturers are understanding that in order to maintain or growth their market share, there have to be a competitive way this product that is not really massively innovative. And so - and this is marginal, but I think in the end, as we drive more high margin products and value add services, I think we will continue with expanding our operating margins, of course, in conjunction with the efficiencies that we are bringing to our business driven by an implementation of more technology.

Excellent. Thank you.

Thank you. And your next question comes from the line of John Kreger from William Blair. Your line is open.

Hi, thanks very much. Stan, can you just maybe go back to the comments you made at the beginning of the call about the new strategic plan for '18 through '20? And just maybe expand on that a little bit to the extent that you are willing. What's new in the plan versus the prior three years? And is there anything specific in there relating to medical since you've made a couple of big moves in dental and animal health? Thanks.

Yes, let me just go quickly through the medical. We are - first we are committed to human healthcare essentially from a high level strategic point of view, 18% of GDP is expended on healthcare, two third of that in the non-communicable diseases area which is essentially driven by and can be reduced by wellness intervention program. This has always been at the heart of Henry Schein's medical business. The alternate care environment that displace the wellness and prevention to take place moving out of the hospital the surgery center, and this is an area we expect to continue to advance. Of course, organically we should very good growth there. We have some very good opportunities ahead of us. Sometimes a bit more lumpy, but essentially this business has done well for years now. And we expect it to continue to do well. And inorganically, there are opportunities to add to that platform I think some profitable businesses that service the alternate care site. So we remain optimistic. As far as the strategic plan is concerned, there are three major planks. The first is to continue to drive efficiencies and make our distribution offering more attractive to our customers. I am not sure this is the time to deal with it but because of time. But Carolynne or Steven can take you through the details. There are many many component parts of this. Some are just an extension of what we had in the '15, '16, '17 strategic plan. Other planks are greater focus on new operating, expanding the operating. Of course, I think what is important here is understanding of way technology is heading and how to use to technology in our business. Lots and lots of technological opportunities we can't afford them all, but we have to focus…

Very helpful. Thank you.

Sure.

Your next question comes from the line of Kevin Ellich from Craig-Hallum. Your line is open.

Thanks for the taking the question. Stan, just wanted to follow up on that. I mean clearly with one and a quarter billion dollars which area seems the most effective in medical or dental? And would that be domestic or global? And then for Steve, Animal Health business remains very strong, can you give us a little color on the competitive landscape and did you say that it could - the spin-off could slip into early 2019?

Thanks, Jeff. The first question, what we can do with the money? So what we will do with the money will be very, very simple; similar to what we've done in the past. Some of it will go towards buying shares back. That's the way we return cash to our investors, it's worked out very well for us, it's relatively cash-free - cash effective way of getting cash into the hands of our shareholders, and as I said, it's worked well. The remainder, there will be a little bit that goes into working capital, but I don't think much, because we expect to be significantly cash flow positive. So the majority will go into investing, and investing only based on strategy opportunity, but also the best return on investment opportunities in the short to medium term. I would say this would be in the medical and dental space, geographic expansion, greater market penetration on the distribution side, value-added services, for sure, we think that the Henry Schein One platform presents huge opportunity to expand our presence in the digital community, specifically in regards to getting patients into the dental office. We have a small dental plan already in there. We think we can add to that and a number of software and other opportunities as they relate to the software area. But then, and of course, the specialty area as well, and adding to that specialty platform, areas that although we may sell the products, whether it's medical orthopedics or diagnostics or specialties like dermatology, which is doing well, aesthetics, and greater variety of products, specialty houses to the platform, the opportunities are endless. And the question is focus as our Vice Chairman, Jim Breslawski always says, we could do anything but not everything. And so, we will be focused on the most strategic but also on the most accretive opportunities for the short to medium term.

Just on the second part of your question, Kevin, so no real significant changes in the competitive landscape that are going to people's attention. And the second part of your question on Animal Health, we did say that it is possible that the spin closes in early Q1. We are still shooting for late Q4 closing. The thing that we really can't predict with great certainty is how long it will take the registration statement to go through SEC and how long it will take to respond to whatever comments the SEC has. And that's why - because we can control that, and that could be a reasonably short process or a longer process depending on the questions and comments. So for that reason, we say it's possible, it could slip into Q1.

Thanks, Steve.

Your next question comes from the line of Erin Wright from Credit Suisse. Your line is open.

Great, thanks. In Animal Health, did you see an incremental impact at all from weather-related items, I guess, in the quarter from the delayed flee and tick season, should we anticipate continued strength in the third and fourth quarter, if you could give us a sense of the quarterly profession and the underlying demand trend you're seeing that would be great. Thanks.

Sure. Probably we had a little bit of help given the warm climate in parts of the country, but what that does is it typically means that the flee and tick season is the longest season that is starting earlier. So hopefully that helps a little bit. But overall, we still feel good about the end markets and our ability to gain market share in Animal Health, and the flee and tick season will continue in Q3 and a little bit into Q4.

Okay, great. And then, on clear aligners, in particular, can you just speak to kind of the opportunity, how you kind of stack-up related to the competition there and then what sort of contributions are embedded in your expectations near-term, or is it more of a longer-term contributor? Thanks.

Right. Erin, we're not providing specific guidance, nor we're contemplating significant profits in the near-term. This is a launch of our new products offering, which is based on the technical first motion 3D system. It uses a unique combination approach with an intuitive and supplied treatment process, whether from minor crowding or cases requiring more extensive work to correct the issues. Our system addresses the correction upfront with the motion 3D system, a three to four month process before the aligner is introduced. As a result, we believe fewer aligners are needed, so this is part of a comprehensive solution, and we believe it's a competitive solution, some of which requires - very often 60 to 86 set of aligners for complicated case versus ours, which we believe will be 20 to 30. And we believe ours is competitively priced. The bottom line is it's a new idea, it does use aligners, we believe we have a significant number of KOLs that are supporting this. It's been well-received, but it is just one product offering, one value-added solution within hundreds within Henry Schein. We're very optimistic. Orthodontic team are highly capable, highly qualified, they are with us for a long time. So we're not giving projections right now, but are very enthusiastic that our whole orthodontic offering - as part of our general specialty offering of implants and bone regenerations and endo will continue to move along in a nice way, and is the basis - in general the basis for our statement that we'll be moving to more over time to more high margin products that I think will provide greater stickiness to our customer base. So, no specifics on contribution of profits, we're just excited to launch, and extremely happy with the reception that our orthodontic team have received from the KOL network. But remember it's not a pure a aligner product, it's a combination product that we believe will in the end be very effective and will continue to be well-received as more patients use this product.

Great, thank you.

Your next question comes from the line of Steven Valiquette from Barclays. Your line is open.

Great, thanks. Good morning, Stan and Steve. So couple quick ones here, you mentioned 18 to 24 month pay back on the new restructuring once completed; I guess just to clarify, are you able to comment on whether you're capturing any material benefit from restructuring in the back-half of 2018 in particular? Does it have a positive impact on the 2018 non-GAAP EPS guidance?

Yes, on that, there will be some benefit we believe, but it's a little early for us to quantify the benefit that will be in the second-half, because again the completion and the timing of those activities is still being calculated. But we do expect some benefit in the back-half of the year as well as going forward. And it has very attractive returns even at the high-end of 24 months still very attractive returns, and it's important for us again to do a combination of lower the cost structure as well as free-up follows for alternative investments.

Okay. And then just a quick gross margin question, the commentary hasn't really been consistent over time, at least from some of your competitors on whether the dental gross margins are higher on consumables versus dental equipment, just remind us where you shake out on that comparison again, just without giving a specific numbers, but just which ones higher versus the other, it seems like the commentary is kind of been mixed over time and throughout the industry, but just curious where that stands for you guys today. Thanks.

Yes, for us, we have been consistent. Our gross margins are higher on the consumables and equipment. They're both very good gross margins, but relative to each other the consumable's a bit higher. So I'm not sure what you're hearing from other industry sources but we consistently said that.

Okay, that's helpful. Thanks.

Okay.

Your next question comes from the line of David Larsen from Leerink. Your line is open.

Hi, congrats on a good quarter. Can you talk a bit about your plans to drive higher gross margin like in sell of Henry Schein brand products, some tech investments in other areas. Thanks.

Sure, David. Thank you for your question. I'll give you some high-level and maybe Steven can provide more color. First of all, it follows really our strategic - the three kinds of our strategic plan; on the distribution side, the goal is to move to high value products. There are some branded manufacturers working with us, some private brand manufacturers working with us, in other words, not valid for the customer our products where we are receiving manufacturer support and driving margin at the same time, driving efficiencies in the business to drive up the - drive down the cost and drive up the operating margin. So, all of that does include the bucket. The second bucket of course is our value-added services. And on the dental side, a huge focus on Henry Schein One; this team has been busy now for over a year working on integration or the plans for the merger, and now the integration, had not been focused on sales much, they've not been focused hugely on margin management, they are not bringing this significant integration into play. Just with the team last week and it's really exciting, the opportunities to use AI, Big Data, Small Data, some call it, to advance the practice to drive demand for dentistry, working of course with the Internet brands, ownership of WebMD, all very, very exciting opportunities that will drive sales stickiness, but high margin. I think we've indicated in prior press releases that we expect over the next two to three years to generation $20 million.

$20 million to $30 million.

$20 million to $30 million of increased profits in this business; our team is very optimistic. And then, the last, the third bucket is our own brand, which includes of course the private brand. And then in the specialty areas, where we manufacture products, but also have products manufactured for us. We are doing quite well in the implants area, we expect to do - there are some strategic additions to that platform hopefully in the not-too-distant future, both in implants and bone regeneration areas. We are doing very well in those two areas. On the endodontic side, bringing innovation to market, but also having a very good position in the lower price also a good product, more generic endodontic treatment arena, lots of opportunity there. And then the orthodontic space as we described with aligners, but also with our core orthodontic offerings, which had really done very, very well from an innovative point of view, and are now gaining market share in this country, and we expect growing market share abroad. So you all add all of that together and that's what's going to drive, but of course, that brings us altogether across the company is the advancement of digital technology interoperability, bringing all three businesses together, lots and lots of opportunity to really have a one-stop-one-Henry Schein-solution to our customers that I think will drive out margins. And also, the connection between our dental business and our medical business in advancing our wellness and prevention should all in the end drive out margin. This is a carefully thought out plan, no difference of previous years or previous strategic plans, and we will execute piece-by-piece and expect to continue as we have for the past 23 years as a public company driving up sales, operating margin, EPS, and yes, cash flow. Steven, anything to add?

Yes, I think you covered it pretty fully. The only thing maybe I'll add is on the Henry Schein One. Those synergies that we noted, $20 million to $30 million by the end of the year three, synergies are very high percentage of those, revenue growth and getting a deeper adoption of some of the services on to our software use of platforms, so that will drive higher revenue growth within the technology segment as well as higher margins as those products get adopted. And similarly on the specialty products, we are growing the specialty products faster organically than the non-specialty products as we just talked about earlier on this call, plus there is opportunity for inorganic growth from time-to-time in the specialty area. So we feel good about continuing to move the mix towards higher margin products. We recognize that that's important for our overall financial model. So those will be only few comments I had in addition to you, Stanley.

Thank you, Steve.

Thanks for the question, David.

We have time to take the last question from the line of Jon Block from Stifel. Your line is open.

Hey, guys. Good morning. I appreciate you taking the questions and fitting me in. Maybe two; first one, I'm going to actually attack on Steve's earlier question on dental gross margins, I know you said consumable higher than equipment, but can you comment on call consumable specialty versus at a basic, just curious because it does look like specialty has been and may continue to just grow faster than basic. And then, I've got a quick follow-up.

Yes. The specialty margins are very, very good, especially in more matured businesses; for example, our implant businesses are quite profitable, and expecting to become even more profitable over time, we are investing - have continued to invest heavily in expanding the platform inorganically and through more efficient production capability. So I think that's an area that has done well for us. The endodontics is more profitable and also not as profitable as the orthodontics, but much more profitable than the core distribution of dental products in general; lots of opportunity there. And orthodontics was relatively early in the game, but the profits are pretty good. We will not say, "Early," we had been the businesses for about a decade, but we had really seen the benefits from our adjustments in terms of management KOLs in the last few years, but the margin is good and is expected to be greater. So on balance, this is the business that is much more profitable; the specialty areas and our core business. Having said that, remember, a key part of our core business is also to sell traditional products to those specialists. And that is also a profitable business. And generally those specialists have a bigger wallet to spend money on - for example, equipment, and yes, software, and then I would add one other thing, we are also advancing our software businesses in these areas. We announced - still they're not closed - our investment in very successful orthodontic software business I believe that has the largest installed base of orthodontic software to supplement our endodontic; very good installed base, I think the largest, and likewise with oral surgeons.

Got it, very…

Jon, just one other comment, I just want to make sure if I understood your question; my comments on gross margin has been higher on consumables. It's true even after you exclude specialty product. It becomes greater on the gross margin benefit, or it's true even excluding these specialty products.

Got it, very helpful. And a follow-up, Steven for you is, can you just talk about at a high-level where the margin compression maybe coming from. And I'm just curious because the 6.1 adjusted internal growth was one of the stronger numbers in a while, and then you also had some of the higher margin dental consumables that came back this quarter. So wondering if you can call out a division or an area where some of that year-over-year margin impression came from? Thanks, guys.

Sure. Well, clearly it's on the gross margin side. And there are couple of factors that we are continuing to invest in as we get future growth that goes into gross margins. So for example, on equipment gross margins, our service technicians that due to repair and installation of equipment is shown - that expense is shown as part of cost of goods sold. And as we make investments to expand the capabilities, especially since we expect to significantly grow our equipment, that's having some impact on the dental equipment gross margins. Similarly, in our technology business, support - technical support for technology is a significant portion of technical support that is also part of cost of goods sold in the technology business. And again, as we make investments in that area, in anticipation of the ramp with Henry Schein One, you are seeing some impact on those two areas. You have to make the investment price to the actual sales coming. So that's why you are seeing a little bit of the impact on the lower margin this quarter. And hopefully that will be very success as we get additional volume in future quarters.

Very helpful, guys, thank you.

So, Operator, I think we need to end the call now. So let me make some closing comments. We are of course pleased with our results for the first-half of 2018. We continue to advance our intellectual capital and the value-added solutions that we offered to our customers. And I would say driven by a highly motivated team Schein, spent a lot of time in the field in the last quarter, from Asia to Europe to North America, and our outside morale is really good. This is a key differentiator in our go-to-market strategy. The fact that our team is so highly motivated in advancing plans to improve on our customers, practice efficiency, provide them with tools, to provide better clinical care, and our customers rely on us as trusted advisors to understand their challenges and pain points. We are offering practitioner solutions and services to really help them management practice and achieve their goals. We have a lot of exciting strategic initiatives underway. As part of our three-year strategic plan, I believe we are highly focused; the team is motivated as I said, and I believe we are well-positioned for another successful three years to execute another successful strategic plan. So, thank you for joining us. Thank you for your interest in Henry Schein. If you any further questions, please feel free to contact Carolynne Borders, in Investor Relations, at 631-390-8105. Steven is also available at 631-843-5915, and looking forward to speaking to you again when we report our third quarter numbers and results performance in November. So, have a good rest of the summer. Thank you very much.

This concludes today's conference. You may now disconnect.