Good morning ladies and gentlemen and welcome to the Henry Schein Second 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, Holly, and thanks to each of you for joining us to discuss Henry Schein's results for the 2019 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, 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 where certain items may vary independently 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 section 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, August 6, 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 to allow us with many listeners as possible to ask a question within the one hour that we have allotted for this call. 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. I'd like to start by highlighting our solid earnings performance for the second quarter as we delivered 8.3% year-over-year growth in GAAP diluted EPS from continuing operations and 10.5% growth on a non-GAAP basis. Now that our 2019 restructuring initiative is complete, we're providing guidance for 2019 GAAP diluted EPS from continuing operations including those restructuring costs. We are also affirming our prior guidance range for 2019 non-GAAP diluted EPS from continuing operations all of which Steven will discuss in greater detail. While second quarter topline results reflect some softness in the North American dental sales, this was offset by solid growth in dental sales in the DACH region, dental specialty sales and medical sales. Although, we believe second quarter grow in the U.S. Dental end market was slower than in recent quarters, we note that the market growth rates in any particular quarter may vary and we had a difficult comparable in the prior year. In other words, I think it is important to take into account the 2018 growth for the quarter versus the 2019 growth for the quarter and make sure that that is understood. We reaffirm our belief that the global Dental and Medical markets remain generally stable and that we are well positioned to continue to grow our presence in the end markets we serve. We've had a track record of growing market share in the markets that we serve and we're confident that we can continue to grow our market share in the years to come. As you know, we have multiple initiatives underway at Henry Schein, aimed at positioning the company for long-term growth. This includes promoting higher-margin products and services. We continue to make good progress with the expansion of our product portfolio, with new internally developed solutions and others through acquisitions. We are well focused on optimizing our infrastructure, as we position Henry Schein for continued growth in the global Dental and Medical markets. So we remain optimistic about the future. At this time, I'll hand the call over to Steven to review our financial results and guidance and then I'll provide some additional commentary on our recent business performance and accomplishments. Steven?

Okay. Thank you, Stanley, and good morning to all. As we begin, I'd like to point out that I will be discussing our results from continuing operations as reported on a GAAP basis and also on a non-GAAP basis. Our Q2 2019 and Q2 2018 non-GAAP results exclude certain costs that are detailed in Exhibit B of today's press release, which is also available in the Investor Relations section of our website. Please note that as we did last quarter, we have included a corporate sales category for Q2 that represents product sales to Covetrus under the transitional services agreements entered into in connection with the Animal Health spin-off that was completed in February of 2019. We expect these sales to Covetrus to continue into the first half of 2020. These are low-margin sales that have a negligible impact on our operating income. For 2019, we expect these corporate sales to total approximately $100 million. Turning now to our Q2 results. Net sales from continuing operations for the quarter ended June 29, 2019, were $2.4 billion, reflecting a 5.7% increase compared with the second quarter of 2018, with internally generated sales growth in local currencies of 3.5%. When excluding those product sales to Covetrus under the TSA, internal sales growth in local currencies was 2.4%. The details of our sales growth are contained in Exhibit A of our earnings news release that was issued today. On a GAAP basis, our operating margin for the second quarter of 2019 was 6.6% and declined about 15 basis points compared with the second quarter of 2018. On a non-GAAP basis, which excludes restructuring costs, our operating margin was 7.1% and essentially flat on a year-over-year basis. Again you can find a reconciliation of GAAP operating income to non-GAAP operating income in the supplemental…

Thank you, Steven. Let me begin with a review of business highlights from our second quarter, starting with Dental. Dental consumable merchandise sales in North America grew by 1.3% in local currency. It's on an internal basis without acquisitions. As Steven mentioned, this is a tough prior year comparable, but we also believe this result is reflective of a relatively low end market growth in the U. S. and that Henry Schein grew slightly faster than our end markets in the U.S. We believe that we continue to increase our global market share in line with our goal, which remains to grow faster than our end markets. A highlight of our North American Dental consumables merchandise business has been sales of specialty dental products which includes implants, orthodontic, endodontic solutions as well as bone regeneration products. Sales of these products continue to grow at healthy rates. In the second quarter, global internal dental specialty sales increased by 6.5% in local currencies, all on an internal basis without acquisitions. Acquisitions add to that and so our global position in the specialty areas continues to grow very, very nicely and we are pleased with the performances of those businesses. As Steven mentioned, North American dental equipment sales growth was impacted by lower high-tech equipment sales, especially CAD/CAM sales as we had a difficult comparable. During the second quarter of 2018, we had our most successful promotion of Omnicam systems. In the second quarter of 2019, we had a successful Omnicam inventory clearance promotion. So we were focused on Omnicam in this quarter from an inventory clearance point of view. And this resulted in lower units failing prices. So if you take that category into account it had a significant dampening effect on our 2019 second quarter sales of equipment. That said, Dentsply…

Operator Instructions] And our first question will come from the line of Glen Santangelo with Guggenheim.

Yeah. Thanks and good morning. Steve, I just wanted to talk to you a little bit more about the equipment side of business. It feels like the real delta relative to your expectations was on the equipment side. And so I was hoping you can maybe unpack that equipment number a little bit and maybe; A, give us a better sense of what you saw on basic versus high-tech and how meaningful was Brazil? Just anything that might be helpful for us as we think about modeling the back half of the year. And then secondly for Stan as a follow-up with respect to the Technology and value-added services, I appreciate the comments. And it certainly seems like you have the right strategy in place with the Henry Schein One platform. But this is the first quarter I can think of where growth in this segment was negative. And so I was just kind of curious as do you view this quarter as a one-off, or was there some type of inflection that we should be aware of? Thanks and I’ll stop there.

Okay. Glen, I'll start with your first question. Thanks for the question. If we look at the North American dental equipment side, roughly two-thirds of our sales in North American equipment is traditional equipment and roughly one-third is high-tech equipment. What we saw was during the quarter, we saw traditional equipment being relatively flat year-over-year growth. And really the weakness on a year-over-year basis was in the high-tech category and there's really two pieces of it. There's digital imaging both the 2D and the 3D imaging which was down. And we think the big reason why it was down was average selling prices are down in this product category and it's also become more of a mature category as more and more people have access -- or have digital X-ray. Separately, the other key component of high-tech equipment is CAD/CAM. On the CAD/CAM side, again Stanley spoke about that we will focus on blowing out the old Omnicam equipment during the quarter. We really while we were selling the new Primescan, I think in earnest we'll really focus more of that in the second half of the year. So, those two categories really were down in the high-tech equipment, call it roughly 6% or 7%. And when you blend that together with traditional equipment, you get to that negative 2.9% for the quarter. If you look at international equipment, international equipment was really negatively impacted by then Brazil. And just to give you a little bit more detail, there are certain segments of the core dental equipment market in Brazil which A, are very low-margin; and B, require significant dating or terms of sale which could run a year or longer. And because of those two conditions, it's really not very profitable at all and we decided to stop selling to those segments of equipment. And when you back out that, our international dental equipment sales grew by 2.6% in constant currency. So, really we had decent growth in international dental equipment excluding the Brazil activity. So, hopefully that provides you the additional color that you were looking for.

Yes, that's great. And maybe Stan if we can talk about that Tech and Value-Added Services?

Yes sure. Just let me also emphasize that the comparables are really important. In 2018, we had a significant and successful promotion of Omnicam in the U.S. And also we had something like 8% growth -- over 8% of our traditional equipment. So, you add those too and it's sort of almost a perfect storm. But we remain highly, highly enthusiastic about our Dental business on the equipment side in the U.S., North America, Canada, as well where we're doing quite well, and in Europe. So, on the Henry Schein financials -- what is it? Call it…

Technology and Value-Add.

Tech and Value-Added Services there's quite a bit that goes into it. Remember from a sales point of view, it's a relatively small number compared to the whole company. So within that, our financial services, the fact that on a comparable basis, equipment sales was lower in North America than in the previous year that impacted our ability to provide leasing services. The second is within that business, there is a business called TechCentral which sells computer hardware, not a great business, but it's a service. We are selling less computer hardware than in the past because essentially the stuff can be bought at lower prices elsewhere. And I think it's just an area that is not as robust as in the past certainly compared to the previous year. And that brings -- suppresses the earnings. There's lumpiness that has to be taken into account. We have some pretty large contracts and you have to be very careful at fine point. Henry Schein's former practice solutions businesses sold a lot of demand generation software, but nowhere near the amount of demand generation software as Internet Brands sold. So we are reporting internal growth, not complete growth. If you look at the complete growth, I think, the business grew by something like 40%. It really doesn't matter exactly whether the internal growth is perfect or not. What counts is where this deal is going to end up or where this joint venture is going to end up a year from now when the -- or actually you'll start seeing it in the next quarter, when the deal has been annualized. So, whether, it's a couple of hundred basis points or even, yes, one way or the other, it's not that relevant and it's really very hard to determine what the exact internal growth rate is on these demand generation software systems, because if we switch a customer to an Internet Brands system, that's a negative on our internal growth. So I think, at the end of the day, the success of this business should be judged, actually next quarter and beyond, when this deal annualizes, because it's a very small base. And for the reasons I've given you, one can misinterpret the impact of a few hundred basis points either way, in terms of sales or even profits.

Thank you. Your next question will come from the line of Jeff Johnson, Baird.

Thank you. Good morning, guys. Steve, I wanted to follow-up on Glen's question on the equipment side of the business in North America this quarter. I think your explanations make total sense, getting rid of some of that Omnicam inventory in that. But maybe, talk to us about just the underlying demand or an interest you're seeing from dentists on digital impression systems, number one. And maybe counter that DI versus full in office CAD/CAM. What do you think over the next year or two you might see the mix of full systems versus the DI? Would be interested in your thoughts there. Thank you.

Sure. Thanks Jeff. I would say that we expect to see continued interest in both the standalone DI, as well as the full systems. I think that there are some customers who kind of would like to walk before they run, so they move to DI and then hopefully over time they'll buy the full CAD/CAM system. It's hard to really predict with great accuracy which will be stronger than the other. But I think they'll both be pretty good growers. Does that help you?

It does. Thank you. And maybe be just as a follow-up, on the consumable side in North America, on the dental side, you gave a 6.5% global, I believe, specialty business. But if I assume specialty in North America was up somewhere in that same ballpark, it would seem as if the general consumables part of your business was flat maybe even down a little bit. So two questions on that. One, just what's going on in your DSO business versus your GP or general practitioner kind of private dentist business? Any difference to call out in growth rate between those two? And just, is there any changes going on with any kind of contractual status with any of your DSOs, at least, at this point? Thank you.

Okay. Thanks Jeff. No. The real issue with consumables and why it was a little bit softer on a year-over-year basis versus the prior quarter over the last couple of quarters, related to one of the months of during the quarter. We really saw an extremely weak April. We're not sure we understand exactly why April was as weak as it was, but the good news was it rebounded in May and May was stronger. And June was really very strong for us. I'll also note that the month of July, while it wasn't quite as strong as June was also a pretty solid month in consumable merchandise for us. So it really wasn't related to DSO's mix between DSOs and private practice or anything like that. It was really just that April month was extremely weak for us. And again we're kind of scratching our heads saying why was that month so weak? But yeah it rebounded in May, June and July. So that was the key reason.

And Jeff I think what's important to add to Steven's comments is that, although we are doing very well with the specialties as a percentage of total sales of consumables, it's small. But it is important from an operating margin and operating -- profit contribution. So I think it's hard sometimes to see that when you look at the externally reported numbers.

Understood. Thank you.

And our next question is going to come from the line of Jonathan Block, Stifel.

Great. Thanks guys. Good morning. Maybe just two for me. The first one, it’s more of a clarification Stanley and Steven, but I think it's important one. So for Brazil it just seems like a different approach to market. And so I believe we should think about that headwind continuing into the back half of 2019 and even 1Q 2020. Is that correct before you lap and change any approach to market? And then I got a second question.

I think you've got to allow for that to annualize out. An unusual phenomenon in Brazil is a couple of very strong different equipment providers. And for us to compete with them in certain areas particularly this traditional equipment it's just not worth it. We did have a similar situation in Italy, maybe a decade ago and we addressed that through in a strategic alliance that we entered into in Italy and that has resulted -- I'm not saying we will do that in Brazil or not. It's too early to tell. But we just don't think it's a good idea to operate in this traditional equipment market in Brazil when the margins are so low and the gating is so long and the risks of bad debt receivables is high. So having said that the consumable business is doing extremely well and it's our intention to focus on high-tech equipment and particularly the specialty areas in Brazil as well as our core business, which as I said is doing well. But Brazil has been a very good market for us. Don't read anything into this other than we're getting out of an unprofitable business.

Got it. Very helpful. And then let's shift gears, Stan I'll stick with you. On capital deployment, you've gone through -- you finished the restructuring now. You've got the big check or cash deals from Covetrus. I know you've done some small deals. But with a better balance sheet and restructuring now in the rearview mirror, maybe you can talk to Schein's appetite for something larger, possibly more transformative and how your pipeline looks over the next six to 12 months from a deals perspective? Thanks guys.

Yeah, sure. Our pipeline remains solid. Obviously no deals until they’re done. We have appetite for something larger but it has to make sense. There are very strict investment criteria not so much on what we paid for the business or the size of the business or the profit of the business going into it, but what it looks like once integrated into the Henry Schein portfolio. We have interest in Medical. We have interest in expanding globally on our core business. We have appetite for specialty businesses in dental and Medical. And so adding to the software platform continues. I think we put quite a bit of capital to work already this year and we expect to continue in years to come. But we -- as you know, we are conservative and we view the future of an acquisition not so much with the cash return only, but -- which has to be good, but the accounting fully loaded with depreciation and amortization. And I think if we are reporting on a cash basis, actually our performance this quarter over the first six months will be better. But at the end of the day, we prefer to go at this more conservative approach which has stood us well for the past 25 years.

And our next question is going to come from the line of John Kreger, William Blair.

Hi, thanks very much. Stan can you talk about the runway that you see remaining within the digital -- various digital categories and dental? It sounds like kind of classic imaging has -- or is getting closer to a full penetration. But if you could just sort of go down the list, where do you see the biggest opportunities for penetration expansion over let's say the next five years? Thanks.

Yes. So, that actually is a very good question. On the imaging, the machines themselves, I think there's a lot of runaway in this country and abroad although I do think the average price per unit is coming down. I'm not saying our profit per unit is coming down, but I think there has to be some deflation in this area I would say, particularly in the U.S. So, I think that's what you could expect. But having said that, there are still many, many dentists that could use digital imaging in their practice. The second thing on the centers that's more commoditized, we're hoping that one or two manufacturers come out with some unique technology. There are promises in that regard, but we haven't seen. So, at the moment to a large extent, it's digitalized -- the digital sensors are a mature product and so it's replacement business. Having said that, there is an opportunity in the cloud area. Having said that a lot of that may actually in our world be classified over time as technology products versus equipment. So, there is opportunity there. We're very excited we've invested in that area. As it relates to the prosthetic side, I think the lab world continues to advance in that area. We're going to see a few more larger labs and much less smaller labs. As these larger labs consolidate, they're investing heavily in the space, I believe we're the leader in this space and we'll do well. As it relates to full systems, I think we will continue to see expansion in that area. We continue in Germany where the market is the most advanced. We are well-positioned to continue with the full system. We have sold the Sirona system there for decades and have the expertise. I…

Great. Thanks Stan. There's also one quick follow-up. How are you feeling about your clear aligner offering within ortho? Is it gaining any traction, or it's just still too soon to tell? Thanks.

Well, that’s also a good question. So I would say to you that, as we've said on numerous calls, we're early into this aligner strategy. We believe we have a very good solution. We're educating the markets on the benefits of our clear aligner solutions, which includes the SLX for the specialists and the Reveal for the GP. We believe that the long-term opportunity for growth in this market is attractive. The whole market is attractive and we believe that we all get a share of that, both from a sales point of view and a profit point of view. And we're excited about participating, but it's much too early for us to come to any conclusions. We know on the specialists side we're getting good traction from our KOLs, we have some very good KOLs. And the Henry Schein sales force is quite excited to be selling the Reveal product. It was voted the number one product at our June National Sales Meeting. That's not so long ago. We have to allow for our products to be understood by our specialty customers and by our sales force in the Henry Schein Dental business. We're not abroad yet. We expect to bring it -- take it abroad sometime in 2020. I think a combination of Reveal and SLX. But in any event, our orthodontic business is small. It's a meaningful business and adds to our overall market share growth in the specialty area. So kind of long story short, we're very small in this space. We're quite small in orthodontics. We're bigger in endodontics and implants, in particular in bone regeneration. So I think the clear aligners will add to our specialty position. But at this point, it's relatively small.

Very helpful. Thank you.

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

Thanks for taking the question. Stan, last quarter, I think, we talked about some of the innovative dental models like mobile dental. So I wanted to get your thoughts this time on the concierge dental market and businesses like dental bar in New York and other disruptors. I guess, where do you think -- where do you see that in the overall grand scheme of things? And how much could that add to your growth?

Yeah. What I don't think I should do is comment on any specific provider. Having said that, innovation is going to occur. I think the DSO will continue to grow. In particular this mid-sized practices continue to grow. They're bringing innovative ideas to the marketplace. I'm not sure with this retail in close dentistry is going to go. I'm quite sure that where a dentist is involved in providing clinical care it's going to be well-received. Where a dentist is not involved, I think there's going to be challenges. I'm not a clinician but I can only imagine that if dentists are not involved it's not going to -- there's not going to be the appropriate quality of care. Having said that, over time whitening products did go in the drug store shelf. And at the same time, our dentists are doing very well with lighting products. So I do believe that there will be additions to this model, equivalents of Uber in transportation. And I can only think that this will be advantageous because half of the American population doesn't go to the dentist. And in particular, I believe some of these models will attract millennials and the younger generation to see a dentist. Having said that, I have to say that dental DSOs that have retail space, ground floor on Main Street's tend to be doing very, very well. So I remain quite optimistic about the future of dentistry because at the foundation the studies that are coming out are showing that there is a direct correlation between good oral care and good health care, so I think this is only going to get better as the payers and even the federal government and local governments understand the importance of oral care in the continuum of care.

Appreciate that. And then with the Cliniclands acquisition, just wanted to see if you could give us any details on how fast the Scandinavian dental markets are growing. And then what are the geographies would you like to expand into? And I have a follow-up for Steve.

Yeah. First of all please remember it's a very small business $10 million, $9.5 million. It's essentially a electronic business with some salespeople, doesn't sell a huge amount of equipment. We will expand that. The market is a big market. I would not expect to gain significant market share with this particular vehicle, but it is a fast growing business. It will generate sales. It helps advance our digital platform. But that digital platform will have to be married with other kinds of practice management software at the time as well as equipment sales and service and we believe field sales representation. We're in this business is essentially Swedish that has some business in Denmark. We already sale some products in Denmark from our German business and sale some products in Norway. These are – Norway’s a very small market. And that's the area we expect to -- this business to continue to grow. We're hopeful by the way that the business will also help us advance our implant market share and our specialty businesses in general.

Great. And then how fast do you think the U.S. end market is going? I know you said you want to pace it, but just wondering if you had a number that you can help us out with.

Yeah. Again very, very hard to tell. We believe the markets are definitely stable; they are going to the minus category. If you had asked that question in April, I would to be concerned. But in May and June and July, as Steven pointed out, we believe there's much more traction in the markets that we're hearing from our suppliers. But the market is definitely stable and leading in a positive direction. I'm not sure there's much inflation. There could be with some of the DSO's deflation, but in any event, I do not believe the market is going backwards. For us, of course, we want to continue to grow our core businesses which obviously grow faster if the market is growing faster. But for us the opportunity lies in our specialty businesses, gaining market share with our Henry Schein One business not only in the U.S. and Canada, but globally. So, the markets are in a positive direction, but I think the Henry Schein prospects of the future are much more driven not only by the market growth, but all these other strategies to enter to advance our position into higher-margin areas and products and services and also, of course, to become more efficient as providers of these products and services.

We have time for one last question. That will come from the line of Nathan Rich, Goldman Sachs.

Hi, thanks for taking the questions. Just two quick ones for Steve. Gross margins are up nicely in the quarter. I was just wondering if you could kind of comment on what drove the expansion. I know you're rolling -- still rolling in some of the higher-margin tech businesses. So, just curious how much of those contributed to the margin performance in the quarter. And if you could kind of comment on the margin trends you're seeing for the Dental and Medical businesses?

Sure. So, thanks for the question Nathan. If you look at overall gross margins, gross margins were driven -- the improvement was driven virtually completely by Technology and a greater percentage of Technology including the acquisition or the joint venture with Henry Schein One. I think it's important also to note that that came with incremental expenses. So, when you look at operating margin expansion, the opposite is true. The operating margin expansion came exclusively from the Healthcare Distribution business not a Technology business. So, it's a little bit complicated there, but gross margin is driven by Technology, but operating margins driven by Healthcare Distribution.

Okay, that's helpful. And just a very quick follow-up Steve. When you -- you talked about kind of June and July being strong kind of relative to April what's the magnitude of the delta that we should be thinking about as you're talking about the area you're seeing that's kind of month-to-month volatility?

Yes. It was quite significant the magnitude. If you look at North American consumables, April was actually down slightly and May and June were positive and grew from May to June. So really a big turnaround between April, that weakness that we saw versus May and June. So, we're hopeful that that's a bit of an anomaly because again we have three months after April where we saw a pretty decent growth in consumable sales. And again it's hard to isolate why that one was so weak, but it just was.

Holly, we're ready to take questions.

Thank you. At this time, there are no further questions. I'll turn the call over to you for closing comments.

Thank you very much operator. As we close today's call, I would like to reiterate that we are most excited about the future of Henry Schein and many opportunities ahead in global Dental and Medical markets we serve. We are halfway through our 2018, 2019 and 2020 strategic plan. We're quite pleased with the progress we've made as we advance our key initiatives, not only to grow our footprint and our position and market share in the global Dental and Medical markets, both growth in terms of market share and profitability, the whole area of value-added services, the second strategy and marketing Schein value-added services as important connections to our core business. That's moving along quite nicely. And then, of course, to make sure that our customers understand clearly what the brand commitment is of Henry Schein, what we do, how we differentiate ourselves from our competition, the value we provide to our suppliers, and at the same time advance our market position our brands, specifically in the specialty areas, Dental and Medical that we own. So very, very excited about the future. Of course, if you have any further questions, please contact Carolynne Borders in Investor Relations 631-390-8105. And look forward to speaking to you again at the Baird Healthcare Conference in September or when we next report our earnings in early November. So have a very good rest of the summer. Thank you.

Thank you for joining today's Henry Schein second quarter 2019 conference call. We appreciate your participation. You may now disconnect.