Good morning, ladies and gentlemen, and welcome to the Henry Schein First Quarter 2019 Conference Call. At this time, all participants are in 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, 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 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 of 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 the GAAP, the 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 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, 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. And that 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 to be 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…

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 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…

[Operator Instructions] And our first question is going to come from the line of John Kreger, William Blair.

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 about 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 and 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 and had 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 valued-add [ph] 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, it is conflicting data out there, but it's our view that less, in the United States for example, less than 20% of practitioners have a digital, some form of digital prosthetic device, be it a scanner or be it a fully integrated scanner machine that also is integrated with bridge and crown milling systems and software. So we think it's still under 20% or so. So there's somewhere around the high 70s of the market that's still available. On the other hand, the imaging systems tends to be more penetrated. Having said that, there is still great opportunity in the imaging side knowing full well that the price of imaging machinery -- digital imaging machinery is coming down somewhat. But in terms of units, there's still market opportunity, quite a nice one, and certainly in terms of units lots and lots of opportunity for Henry Schein. So digital dentistry presents huge opportunity for us, what I was talking about is the US but the same general concept apply in Europe and, of course, certainly elsewhere.

Our next question will come from the line of Jon Block, Stifel Nicolaus.

I'm actually going to start with DI as well. And specific to DI, can you just talk about what the dentist 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 inter-operability 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 one's 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 time guys.

Okay. Thanks, John. So, Q1 was a very strong quarter, what we expect operating margins we were able to reduce and really came from operating expense reduction 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 then 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 cost out of the system, so again very good for Q1, but we're not ready yet to say that's a full-year opportunity.

And our next question will come from the line of Jeff Johnson, Baird.

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 raise 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 some 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.

Our next question will come from the line of Nathan Rich, Goldman Sachs.

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 then market is stable. So I was just wondering if you 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's 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 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 was very strong for us and 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, and we've said this for many years now last 2 or 3 years. In fact the dental markets are stable and consumable market. I'm the referring to particular and is leaning positively, there are some parts of the world where it's leaning more positively the US 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% one 2% and if it grows. One, the sales and to 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 aggregated purchases with us of consumables equipment software and particularly. Now specialty products I think consistent with past the markets are stable 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 co-ventures 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 in 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 it continues 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 registration is complete so it's going to continue for little while now I think you said mid-2020 it could go a little bit further we're a little bit less than that, because we'll try to accommodate co-batches as they need it, because we're not really buying product just for cult 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.

Our next question will come from the line of Kevin Ellich, Craig Hallum.

Hi guys, this is actually Ryan Cameron [ph] on for Kevin just 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 got follow-up.

Sure. Well, again, on an EPS basis, foreign exchange negatively impacted this quarter. Our EPS by $0.015, you can look at the details of the sales that we went through that show the sales impact. I think -- again, I always believe that really difficult if not impossible to predict foreign exchange movements, there is too many things that impacted geopolitical things other things that go on. So for us, we're really assuming that the foreign exchange impact is consistent or foreign exchange rates are consistent with what we've seen in Q1. If there are significant deviations from that, that could impact our guidance, but right now we're not assuming that.

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 work 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 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 implant 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 surgeon, love to see us so the complete blind every other surgeon we haven't whether its consumables equipment, pharmaceuticals med-surge and different technology, the same with the Ortho doctors love to see our aligner program grow its 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 being easier product to use to our GP customers through our U.S. sales force. And our national sales meeting in the few months I'd love to see that grow. But we are a 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 [ph] which is the lower-end from the pricing point of view of endodontics is doing quite well. And just to go back on the low-end of the -- low priced and of implant side. Our recently closed acquisition and the dentist seems 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.

Our next question will come from the line of Steven Valiquette, Barclays.

Great, thanks, good morning guys. A couple of questions here. I guess, first just tying together a couple of earlier questions on the topics of operating margins and FX, I guess, I'm just curious in the first quarter. And with that operating margin expansion, did you calculate how much the FX movement actually skewed the reported operating margins in 1Q? And also just in relation to the restructuring overall, just remind us again -- just categorically how much benefit you get in the COGS line versus the SG&A line; just sort of big picture? I'm not looking for any numbers but just -- it's heavily skewed towards one expense line versus the other? Thanks.

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 a 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 op -- virtually, all on the operating expense line.

Got it, okay. Alright Thanks.

And our next question will come from the line of Michael Cherny Bank of America Merrill Lynch.

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 are, 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.

Our next question will come from the line of Kevin Caliendo, UBS.

Hey guys, thanks for taking my call. On the TSA's, I just -- I appreciate the color on the $100 million. How should we think about the cadence of that over the course of the year?

I would think that it would be relative number; Q1 is a short quarter for both sales to [indiscernible] 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 [ph]. Effectively that's a transfer of products from us through covetrus [ph] even though GAAP requires it to be shown this to sell, it's a sale, again, with no profitability or very marginable -- marginal profitability at the operating income line.

And just to follow-up on Michael's question about the specific expenses. I appreciate the detail. But can you talk a little bit about the magnitude, is it $2 million, $5 million for just from -- as we try to understand the cadence for the year and trying to understand -- help us model that?

It wasn't all related to that -- I would say that approximately half of that would be we beat by $0.04 maybe half of it was related to this activity of lower expenses that may not reoccur and the balance was a number of other things, but I would say roughly half about beat was related to that.

And we have time for one final question. That question will come from the line of Sarah James, Piper Jaffray.

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 been going since then, how much of that ramp comes in 2Q versus a little bit further on in the year? If you could give us some color on pacing. That would be helpful.

And so Sarah, traditionally, since IBS is right at the end of the quarter and traditionally IBS involves sale mostly equipment and equipment acquired generally installation is nothing really ship in the first quarter, then you start seeing it in the second quarter and ending in the 3rd quarter. Hard to get the timing between the second and the 3rd, 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 quarter in accordance with what is traditionally unfolded in an IBS year. So I give you more specifics but it’s very hard to…

I would add is, it's probably more in Q2 and less than 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 3 years, which builds on the success of the last few strategic plans, we are focused on advancing our distribution business from a 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 3rd, 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 [ph] 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 and 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.

Once again, we'd like to thank you for participating in today's Henry Schein Conference call. You may now disconnect.