Good morning ladies and gentlemen and welcome to the Henry Schein third quarter 2019 conference call. All lines have been placed on mute. 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. Before I begin, I want to make sure that we no longer have that background noise. It sounds like it is now muted. Thank you. Thanks to each of you for joining us to discuss Henry Schein's results for the 2019 third 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 referenced 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 key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for information 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 and in Exhibit B of today's press release which is available in the Investor Relations section of our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 5, 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 as many listeners as possible to ask a question within the one hour 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. We are pleased that we reported solid third quarter financial results with increases in diluted EPS from continuing operations of 54.2% on a GAAP basis and 15.4% on a non-GAAP basis. We continue to make progress in growing organically with a focus on sales of higher-margin products while making strategic investments to supplement growth in the years ahead. Today, we are tightening our guidance range for 2019 non-GAAP EPS from continuing operations, which reflects growth of 8% to 9% compared to 2018 results. Steven will discuss this in greater detail in a moment but note that we continue to believe that global dental and medical markets that we serve are growing. We are executing well on our 2018 to 2020 strategic plan, especially in the slow-growing U.S. dental consumable market. As we progress with our strategic plan, we are confident that we are well positioned to gain further market share in all our businesses, leading to increased EPS. We are particularly pleased this quarter with the performance in our international businesses as well as our dental specialties, technology and value-added services and U.S. medical businesses. As you listen to our call today and of course read our filings, I hope that our investors appreciate that we are making solid progress in driving the composition of our operating margin towards higher margin products, including our specialty brands, suppliers who value the services we provide and of course efficiencies in the business. While we are investing heavily in additional value-added services and digital signal technology, both in our distribution, manufacturing and Henry Schein One businesses as well as human capital, our number one assets and of course continue to advance satisfying and in fact, exceeding the needs of our customers in environments where all businesses are faced with increased expectations by customers. So I hope that I believe we provided the information needed for our investors to come to the conclusion that I just outlined. So at this time, I will hand the call over to Steven to review our financial results and guidance and then I will provide some additional commentary on our recent business performance and accomplishments as well as a number of other matters. Thank you. Steven?

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 from continuing operations as reported on a GAAP basis and also on a non-GAAP basis. Our Q3 2019 and Q3 2018 non-GAAP results exclude certain costs that are detailed in Exhibit B of today's press release and in the supplemental information section of our Investor Relations website. Please note that as with the first half of the year, we have again included a corporate sales category for Q3 that represents sales to Covetrus under the transition services agreement. There product related TSAs are currently scheduled to run through August 2020. It should also be noted that in October 2019, we sold our minority equity interest in Hu-Friedy, a manufacturer of dental instruments and infection prevention solutions. This minority investment sale will result in a significant fourth quarter gain in 2019. However, at this time, we are still quantifying the exact amount of the gain due to certain contingent consideration included in the transaction. I will also note that this investment was a non-controlling investment and we were not involved in running the business. We also had no representation on the company's Board of Directors. This was a financial investment. We have had an excellent relationship over many years with Hu-Friedy as one of their key distribute distribution partners, in particular helping them build share in the international markets. So now turning to our Q3 results. Net sales from continuing operations for the quarter ended September 28, 2019, were $2.5 billion, reflecting a 6.5% increase compared with the third quarter of 2018, with internally generated sales growth in local currencies of 3.9%. When excluding the sales to Covetrus under the TSA, internal sales growth in local…

Thank you Steven. Let's begin with a review of our third quarter dental business highlights. During the quarter, the North American dental consumable merchandise internal sales grew by 1.2% in local currencies as we reported earlier on. As Steven mentioned, this despite a difficult comparison to the third quarter last year when we reported growth of more than 4%. In the third quarter, we believe Henry Schein grew slightly faster than the end markets. Internationally, dental consumables internal sales in local currencies grew 4.1%. This was also faster than our estimates for the end market growth driven by broad-based sales across the entire business, in part driven by strong dental specialty sales as well. And the third quarter internal sales of global dental specialty products increased 9.3% in local currencies and we did particularly well in the areas of implants and bone regeneration products and endodontic products of our own brands. In dental equipment, internal sales in the third quarter in North America declined 4.5% in local currencies, primarily related to decline in high-tech equipment revenue. Traditional equipment sales grew at a healthy rate of 4.8%. We are particularly pleased with our performance on the equipment sales in general. As you may know, one of our large dental manufacturing partners, Dentsply Sirona, there was a key sales event early in the fourth quarter and we believe a portion of practices in the U.S. held off on equipment purchases in anticipation of show promotions. Last year, this event was in the third quarter of 2018. This was an excellent sales event for Henry Schein, particularly for sales of high tech equipment and specifically CAD/CAM and extraoral imaging products. More than twice as many of our dental customers attended the Dentsply Sirona World compared to last year and we believe the strong…

[Operator Instructions]. Our first question is going to come from the line of Glen Santangelo, Guggenheim.

Hi. Yes. Thanks for taking my question. I just wanted to comment on underlying market growth rate trends in the North American dental business. It looks this quarter that the consumable business obviously was facing a difficult 4%-plus comp last year and the equipment business was obviously impacted by the timing of the Dentsply event. But as we look to the balance of the year, have you seen any change in those underlying trends in either of those two businesses? And where would you sort of peg the growth rates at for each?

Yes. Glen, I think it's hard to be precise within basis points. I mean they are in a very narrow trading range. But if you kind of look at on the consumable side, what we did in 2018, what we did in 2019, you divide by two, it's something like that. Maybe a little lower, maybe a little higher but it's some deflation, not a lot. The unit growth is about stable in general, quite well with pretty good growth in the specialty areas and the number of procedures. So on balance, it's very hard to be precise. On equipment, the market is quite healthy and we often caution investors not to look at one or two quarters but to take a look at a 12-month, four quarter, something like that. This quarter was a particularly unusual quarter. We actually had very good traditional equipment sales. One or two vendors did well. One or two vendors were somewhat challenged. We had some challenges with the CAD/CAM and the extraoral imaging products. But in that regard, a lot of that is related to a particular supplier, Dentsply who held a convention in the third quarter and we have reported that we have a pretty solid backlog of equipment going into the fourth quarter. So I think it's very, very hard to be precise within basis points. But generally, I think these markets are positive with equipment being quite good. I am not saying we were surprised with the positive developments on the traditional equipment side, but I think that's an indication that practitioners are prepared to invest in their practice and by the way, this is not only in the United States but in Europe also. With the surprisingly challenging economy in most of our major markets, we have done quite well. And I think we did pick up market share. But the bottom line is practitioners are investing in their practices.

I appreciate the comments, Stan. Steve, maybe if I could just follow-up on the initial fiscal 2020 guide. I was kind of just curious, are you assuming any trend changes in any of those underlying markets? I know you specifically did not include any capital deployment in your guidance and you sort of called out the IT investments. I just wonder if you could maybe size that? And any sort of high level commentary to help us think about that initial guidance would be helpful. Thanks.

Sure. So the 2020 guidance assumes that market conditions are pretty much consistent with what we are currently experiencing. So we are still expecting U.S. consumable merchandise growth to be modest. We are expecting a little bit of pickup on overall equipment. Again, we think Q3 was negatively impacted by, again, the Dentsply Sirona World sales event. But we do have a little bit of headwinds in a couple of areas. One is in stranded costs. Stranded cost in 2020 are expected to be greater than 2019. Right now, we are estimating that they could be at the high-end of the range, could be $10 million to $12 million. But we are working very diligently on reducing those stranded costs. But there is still more work to be done to see how far we can reduce them. But again, right now, the estimate is in the $10 million to $12 million range. And there were also increased investments in the technology investments. We are not quantifying exactly how much that is, but certainly it's in the millions of dollars range of increased IT investments. Part of that is going to be ongoing because some of those IT investments are not a one-year event. They are multiple year events. So I think the step-up is in 2020. And hopefully they won't as significant a step-up in future years. We also assume from the effective tax rate, that the tax rate will be approximately equal to or slightly less than what we currently are experiencing. So at the 24% range or slightly below 24%. And we are assuming a little bit, not the full amount, a little bit of stock buyback in our guidance. We are not assuming the full amount that was authorized since it's difficult to predict exactly how much we will buyback in any given year.

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

Great. Thanks guys. Good morning. Nice quarter. I am actually going to start with the specialty consumable number. Stan, I thought you gave a number around 9% or even over 9%. That's a big number. So was that predominantly or all driven by implants? Are there any incremental revenues coming from some of your other initiatives like I guess what I am alluding to would be clear aligners and do you that high single digit number from specialty can be maintained as we look forward?

Thanks. Jon, that's a very good question. I think we have outlined to Wall Street on many occasions that our goal is, of course, to continue to make our distribution business a core business more efficient, continue to grow market share, satisfy the complexities of our customers, they are growing, some of them, even the small customers have great demand today for our value-added services. But we have two key programs, well three key initiatives to mitigate margin compression. The first is specialty products. I will cover that in a minute. The second is value-added services. And the third is expense mitigation, in other words, driving efficiency in the practice business. A slight bonus in that, a challenge in that, because we had the Covetrus -- sorry.

TSA sales.

TSA sales and the stranded costs that we have to deal with. But now if you go into specialty businesses, we have a relatively small market share. And what we have shown to be successful is to combine the specialty products, the niche products with the general merchandise and equipment we sell and bundle that with the practice management software where we have leading positions in several of the specialty areas. So yes, we believe we can continue to grow our specialty product businesses in the niche products as well as the general consumables and equipment and software. Returning to the niche products. We believe we have a small market share, relatively small market share, in implants and bone regeneration. Yet, these are important positions. We have great platform. We have very good know-how. We have excellent facilities. The management is really superb. And we believe we can continue. Now I cannot guarantee. Of course, no one can that we will have double digit growth in implants and bone regeneration products going forward. And at the same time, I think we have a relatively small position in the worldwide endodontic market. We certainly work with certain branded manufacturers and hope to continue to do that. But we also have our own brand products that are doing quite well and have also returned somewhere around double digit growth. Orthodontics is a bit more challenging, shall we say. We have a very small business in wires and brackets. I think there is an opportunity there. We have some unique products and we are doing well with the unique products. That market is not growing significantly, although it's probably somewhere between stable and a slight decrease. On the aligner side, I think we have a good product. We have had a soft launch.…

Great. Fantastic color. Thanks for that. And with the second question, I will just pivot over to the medical business. The 5% change in total was still well above industry. But the two-year stack was about 10%, the past tow years in 2017 and 2018, the two years stacks were a lot closer to midteens. So should we just think about the rate of your market share gain is starting to diminish a bit? And maybe that mid single digit plus type of number for medical is the better neighborhood to be in? Thanks for your time, guys.

Yes. Glen, I think we have mentioned this before with respect to medical. You can't judge one particular quarter. First, I think we will continue to invest in additional businesses in the medical field to expand our offering. So that will bring us acquisition growth, but that offering will also bring us internal growth. NAR, for example, is a very nice product offering. We have got acquisition growth but it will result in internal growth. One also has to be careful in looking at any one quarter. There are so many variables. You take flu, for example. One year, there is a demand for flu test. The other year there is not. One year, a flu vaccine is delivered in the third quarter. One year, it's delivered in the fourth quarter. So I think what's important here is to look at our business over a three, four quarter basis and again, we don't have a crystal ball but we are pretty comfortable that we are positioned to deal with the service, the transfer of procedures from the acute care setting to the office-based or the surgery center environments or even the urgent center environment and to gain further market share in that area. And those are reasonably fast growing markets and we are quite comfortable in that. We have got a really outstanding management team there too. They are investing in software, unique software for those markets. And so with the acquisitions, we will expect to have greater internal growth, acquisition growth and continue to gain market share in a he market that is growing. So it's hard to gauge one quarter at a time and hard to talk about whether it is going to be double digit growth or not, but it is going to be a decent market growth and sales growth and will continue to add to our profitability in combination with all the other strategies we just outlined.

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

Thank you. Good morning guys. Stanley, I want to follow up on a comment you made earlier about the dental equipment business and looking at it over more than a single quarter. If I look over the last 12 months, it seems like your North American dental equipment revenue is kind of flat, maybe even down a little bit from the 12 month period prior to that. So if I take that longer term view, what has been the change in cadence of equipment demand or selling on your part over the last few quarters relative to maybe a year or two ago where we were?

Yes. Jeff, it's a very good question. I am glad you asked it. So in the quarters after we added CEREC, in particular Sirona, but CEREC in particular, we had a significant bulge in pent-up demand that we satisfied. That initial demand bulge has kind of faded out. But at the same time, we are starting to gain, I think, market share within that category from customers that we are introducing the CEREC and related lines to. So I think that's number one. Number two is and I think we have mentioned in the past, there has been quite a bit of deflation with certain 2-D and 3-D imaging equipment, not units. I am pretty sure, I can't say for sure, but that market has now stabilized. And actually, I believe that as manufacturers come out with unique technology or improve on their offering, the price is likely to go up. So taking those two into account and looking at an aggregation of the average of, say, four quarters, I think we are in positive territory. And I do believe that practitioners are investing in their practices here and abroad and that technology can help practitioners operate a more efficient practice, increase the profitability of the practice while providing better clinical care. And yes, there is also a little bit price compression on scanners, sensors, but overall I think this is a very good market and I believe that we continue to gain market share in all the markets we are in.

Great. That's helpful. And Steve, maybe as a follow-up, just on 2020 guidance, 6% to 9% EPS growth. It would imply, I am assuming anyway, a little bit of leverage in the model in addition to maybe some repo and other helpers below the revenue line as well. But I guess what I am trying to get or hoping you can provide some color on is, how should we think about margin gating next year? I know you don't guide on margin, but if there is some leverage to be had in the model, we have got business mix as an issue, ERP investments, restructuring. Is it going to be mainly come through OpEx where that margin can go up next year a bit and we should think about gross margins closer to how we have may be seen it here in the current quarter?

Yes. Let me provide some color. So first, when you look at our Q3 reported gross margin, it's down 33 basis points. But when you exclude the very low margin sales to Covetrus under the TSAs, it's only down about nine basis points. So that's why we are providing that level of detail, Jeff, on the TSA sales so people can look at our margins with and without the Covetrus. So really, all of our margin expansion in the current quarter is coming from leveraging expenses and getting lower expenses as a percentage of sales. I think that we would expect that to continue in 2020. But I would caution that we are not expecting the full 20 basis points or more in 2020 of operating margin expansion because of some of the things we just talked about, stranded cost and other things. We do believe that longer term, we can get back to that type of margin expansion but right now in 2020, we really don't expect that we expect a more modest operating margin expansion. And that's why we are looking to do more restructuring in 2020 because it will help us accelerate eliminating or mitigating those stranded costs as well as taking more cost out of the system to help offset some of the slight gross margin decline.

Very helpful. Thanks guys.

Our next question will come from the line of Courtney Owens, William Blair.

Hi guys. So my first question is on Henry Schein One. So it appears to still be driving meaningful growth and experiencing good customer uptick. I guess, from your vantage point, what do guys really think differentiate the product at this point and given kind of feedback from customers thus far from other competitor's offering? Thanks.

Well, it's very hard to do this on a telephone call and this is an area where investors are interested and I really would investors would be interested. The best thing would be to attend a briefing at one of the dental shows where we can show the product. But clearly, we had a very unique cloud-based system that is based on Ascend, that is based on Dentrix, the leading Windows-based system which is richer with features, I believe, that there is no other system that has all these features. The system is, also both those systems, together with the three, actually four specialty software systems that we have for ortho, endo and oral surgery and the unique systems we have that service dental schools. I think 90%-plus of dental schools use our software, the military, a large DSO, all of these unique needs of these customers, in one way or another, are satisfied by the software. In addition, we have quite unique electronic medical record software that is interoperable with many suppliers, not all suppliers yet because some supplies are still having challenges developing a software to connect. But most of, many of the leading suppliers are interoperable with us already in the areas of imaging and to some extent of digital prosthetics. And then you move into the various kinds of digital exchange of information, whether it's credit card processing, patient financing and a big area where we, I think, have a quite an important market share is in various forms of demand generation, including risk mitigation software, website management design, it is a large offering in an area that I think is highly factionalized from a competitive point of view. I am not sure if there is any one competitor that has anywhere near the aggregation of opportunities that we present dentists with. And that is, of course, not only in the U.S., which is what I just covered but also in international markets where we have different software covering most of what I just described.

Let me just add, Courtney, that on the Henry Schein website, the Investor Relations section of our website, we hosted a webinar for certain investors that were looking for more information on Henry Schein One and that webinar is still up on the website. So people can view that. It gives a lot of great detail on what these services and solutions are. And so I would invite investors who are really interested to take a look at it and if you have follow-up questions, call us and we will be happy to answer those questions. We could also, if people want more detail on it, we could also set something up separately for a group of investors it that's what's wanted. The other thing I just want to add to what Stanley said is, I would say that no one has, it was kind of at the end of Stanley's remarks, I just don't want to lose it, no competitor has the breadth and level of services that we have. Some people may just have a cloud-based system. Other people may have patient engagement tools. But we really have all of the tools under one roof and they all connect with each other very seamlessly. Some of the new products are still being connected better. But I think that really differentiates us that we really can go to customers and all of their technology services and solutions can be provided by Henry Schein One.

And we have time for one final question. Our last question for today will come from the line of Nathan Rich, Goldman Sachs.

Great. Thanks. Two quick ones, if I could. Steve, first on the updated 2019 guidance, it implies a 4Q EPS number that's roughly flat sequentially. I think in 4Q, you usually see a bit of a sequential growth just with it being a higher volume quarter and you also have the DS World shift this year. So could you maybe just talk about what's driving your expectations there as we think about the cadence for 4Q?

Yes. I would say that Q4 is impacted, Q3, let me say it this way. Q3 had a significant amount of favorable timing things that happens in Q3 that will not repeat in Q4. So let me give some more details to that. So one is this Department of Defense contract that happened in Q3. We were expecting it to happen in Q4. Two is, there is little bit higher stranded cost in Q4 versus Q3. Three, we did restructuring last year in Q4 of 2018 and we won't have that same year-over-year benefit in 2019 because we are not doing restructuring in Q3 and Q4. So there is a little bit of foreign exchange headwind. So there is a number of items but I would characterize it all as largely timing between Q3 and Q4. And that's why we maintained other than tightening the range for just one quarter left in the year, we basically maintained our full year guidance.

Okay. Great. That makes sense. And then just lastly, Steve, as we kind of look out to 2020, are there any large kind of customer renewals especially on the dental side that we should have in mind? And maybe more broadly, just can you maybe talk about what you are seeing from these customers in terms of purchasing behavior and have you been able to kind of penetrate those customers, especially products? And what's driving some of the strength in the specialty businesses that you guys cited earlier?

Sure. So again, we have elected not to put out press releases and publicly talk about every time we renew or win a contract with large DSOs. But I will say that even in 2019, we renewed a couple of contracts. So we are happy with that. There is really not big activity expected in 2020 for renewals or things like that. So that should not be anything that we are concerned about. We are looking to add customers in the DSO side. So I would say that our belief is that could be next year, slightly more upside than downside. Of course, when we are working with these large DSOs on renewals, we always have to sharpen our pencil a little bit on pricing but that's expected. And I would just conclude by saying that I think our service and relationships with these large DSOs is really superb and I don't think that people want to move for very small modest financial gains because it's difficult to switch and again there is risk that service levels from others won't be as strong as ours. So we feel we are in good shape and we feel that we will continue to have a very strong market position on DSOs going forward. But there is always renewals each year that are coming up. Again 2019 included at least two renewals that I am aware of.

And we do continue to add new accounts, both in the large account area and the midsize practices.

Thank you. I would now like to turn the call back over to Stanley Bergman for any final remarks.

Thank you operator. As we close today's call, I would like to underscore that we believe we are executing well on our growth initiatives as our strategy and value proposition continue to resonate with our customers. It is not a strategy that came together quickly. It's a strategy, a deliberate strategy that we have been executing on for the last three strategic plans, each a three-year plan and we are half, almost two-thirds of the way through 2018, 2019 and 2020 plan. We will shortly start preparing the plan for 2021, 2022, 2023. Yesterday marked the 2fourth anniversary of our IPO. On a compound annual growth basis through the end of 2018, we grew sales by 13% and non-GAAP EPS from continuing operations by 14%. We have also provided a return on investment of 13% on a compound annual growth basis. If you have any further questions, please contact Carolynne Borders and Investor Relations at 631-390-8105. We believe that we are well positioned, as I noted, for the future. We have a good track record, I believe an outstanding management team with a deep bench, 19,000 committed Team Schein members around the world and we look forward very much to the future. We will be at the Credit Suisse Healthcare Conference in Phoenix and at the Greater New York Dental Show, both in November. For our investors in Europe, we hope to see you at the NASDAQ Investor Conference in London in early December. So there will be ample opportunity to meet our executives in the field. But if you have any questions, please feel free to call Carolynne with specific questions or actually visit our website. So thank you for joining us today and look forward to speaking to you on the next call. Thank you.

Thank you. That will conclude today's Henry Schein conference call. We appreciate your participation and ask that you please disconnect.