Q3 2019 Earnings Call
Good morning, ladies and gentleman and welcome to the Henry Schein third quarter 2019 conference call. All lines have been placed on upper tips on in listen only mode.
Later, we will conduct a question answer session and instructions will follow at that time, if anyone should require assistance during the call. Please press the star keep followed by zero on your Touchtone phone as a reminder, that being reported I would now like to introduce your host for today's call Snowboarders, Henry Schein like <unk> and others.
Please go ahead.
Thank you Holly before I begin I wanted 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 Scheins results for the 2019 third quarter with me on the call today, our 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 as forward looking as you know risks and uncertainties involved in the company's business may affect the matters reference 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 filings with the Securities and Exchange Commission, including in the risk factor section of our annual report on Form 10-K . In addition, all comments about the markets, we serve including end market growth.
Great and market share are based upon the company's internal analysis and estimates.
The 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 a 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 use by managed.
Then 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 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 Fiveth 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 M&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 Karen good morning, everyone and thank you for joining us.
We are pleased but we reported solid third quarter financial results with decreases 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're tightening our gardens range.
2019, non-GAAP EPS from continuing operations, which reflects growth of 8% to 9% compared to 2018 results.
Stephen will discuss this in greater detail in a moment, but note that we continue to believe the global dental and medical markets.
But we serve a growing.
We are executing well on our 2018 to 2020 strategic plan.
Especially in a slow growing U.S. dental consumable market.
As we progress with our strategic plan. We are confident that we are well positioned the going further market share in all our businesses leading to increased EPS.
We are particularly pleased this quarter with the performance.
Nine to national businesses, as well as our dental specialties technology and value added services and us medical businesses.
As you listen to our call today and of course read our filings.
I hope that all 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 check no technology both.
And 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 with all businesses are faced with increased expectations by customers. So.
I hope that our and believe we provided the information needed for our investors to come to the conclusion that I just outlined so at this time I'll hand, the call over the Stephen to review, our financial results and guidance and then I'll provide some additional commentary on our recent business performance and occur.
Plus shipments as well as a number of other matters. Thank you Steven Okay. Thank you Stanley and good morning to oil 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 Q3 2019 in Q3 2080.
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 we're began included costs a corporate sales category for Q3 that represent sales to co vectrus under the transition services agreements.
These product related see assays are currently scheduled to run through August 2020.
It should also be noted that in October 2019, we sold our minority equity interest in you freed a manufacturer of dental instruments and infection prevention solutions. This minority in 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'll also note that this investment was a non controlling investment and we will 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, what would be treated as one of the 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 2018 with internally generated sales growth in local currencies of three point.
9%.
When excluding the sales to co betters under the TSA internal sales growth in local currencies was 3.0%.
Details of our sales growth are contained in exhibit a of our earnings press release that was issued earlier this morning.
On a GAAP basis operating margin for the third quarter of 2019 was 7.5% and increased 230 223 basis points compared with the third quarter with 2018.
On a non-GAAP basis, which excludes restructuring costs in both periods and also excludes the litigation settlement expense in the prior year operating margin was 7.4% and increased 20 basis points on a year over year basis, mainly due to lower expenses as a percentage of sales.
Of that 20 basis point increase in operating margin acquisitions contributed 12 basis points you can find a reconciliation of GAAP operating margin to non-GAAP operating margin in the supplemental info page on the Investor Relations.
Page of our website.
Turning to taxes, our reported GAAP effective tax rate for the third quarter 2019 was 23.5%. This compares with 15.7% GAAP effective tax rate for the third quarter of 2018.
However, on a non-GAAP basis, our effective tax rate was 23.5% and this compares with the prior year non-GAAP effective tax rate of 22.5% in the same period last year again look at the some supplemental info page on the Investor Relations page of our website for reconciliations of GAAP to non-GAAP taxes.
We estimate that our full year effective tax rate will be the 24% range, both on a GAAP and non-GAAP basis.
Moving on net income from continuing operations attributable to Henry Schein Inc. for Q3 of 2019 was $134.9 million or 91 cents per diluted share and this compares with the prior year GAAP net income from continuing operations of $90.8 million or 59 cents per share.
Yes.
Third quarter 2019 results include a pre tax reduction in the estimated restructuring costs that we previously.
Have accrued of about $800000 or one cents per diluted share.
Again, those restructuring costs were originally accrued in earlier periods and this is a small change in the estimate for those costs.
Excluding the reduction in restructuring costs non-GAAP net income from continuing operations for the third quarter with 2019 was $134.3 million or 90 cents per diluted share and this compares with non-GAAP net income from continuing operations of $120 million for 78 cents per diluted.
Share for the third quarter 2018, this represents growth of 12% and 15.4% respectively.
If we provide looking to provide some additional detail on our results from continuing operations. It's important to note that amortization from acquired intangible assets for Q3, 2019 was 29.5 million pre tax or 15 cents per diluted share. This compares with $19 million pre tax.
Or nine cents per diluted share for the same period last year for the first nine months of the year.
The amortization was $79.6 million pretax or 40 cents per diluted share.
And that compares to.
The nine months of $56.2 million pre tax were 20 cents per diluted share in the same period last year.
I'll also note in Q3 of this year foreign exchange currency negatively impacted our diluted EPS by approximately one cents.
For the quarter.
Let me now provide some detail on the sales results for the quarter, our dental sales were $1.5 billion and increased 2.1% compared with the prior year with internal growth in local currencies of 1.7%.
North American internal sales in local currencies was down 42% and included 1.2% growth and sales of dental consumable merchandise. This growth was priced primarily driven by strong sales of dental specialty products and there's also against a difficult comparison in the prior year as internal sales growth for dental consumer.
Bubbles last year was 4.3%.
Our dental equipment sales and service.
Revenues included internal sales.
That decreased 4.5% in local currencies.
Thats partially.
Related to a deferral of sales orders in anticipation of the dense places around the world sales event, which was held in October this year and was held in Q3 last year that contributed to a decline in high Tech equipment sales. This decline was mostly driven by lower CAD Cam sales.
Because of that selling events I'll also note that our current dental equipment backlog is very solid.
International dental internal sales growth in local currencies was 5.0%. This included 4.1% growth in sales of dental consumable merchandise.
Our growth in internal and international consumable merchandise sales was driven by broad based sales growth across Europe .
And other and other international markets, including strong dental specialty sales in our international markets International dental equipment sales and service revenue internal growth in local currencies was 7.9%, including very strong CAD Cam sales note that that that our change in our business model in Brazil.
Oil and very little impact on the international dental equipment sales in the current quarter.
Medical sales were $804 million in the third quarter, an increase of 11.3% with internally generated sales growth in local currencies of 5.3%.
The 5.3% internal growth in local currencies was.
The same number in both North America and internationally.
Our medical sales results. Once again are driven by both solid organic growth along with the contribution of acquisition sales growth from North American rescue acquisition.
We believe our medical group is well positioned with large group practices independent physician offices and alternate sites of care with strong customer relationships in each category contributing to our growth.
Our technology and value added services sales from continuing operations were 137 million in the third quarter, an increase of 15.1% with internally generated sales growth in local currencies of 4.9% in.
In North America technology internal sales growth in local currencies was 4.5% on an as reported basis.
Our technology sales in Q3, 2019 were bolstered by a billing related to the US Department of defense contract, which was approximately $9 million in the current quarter and that compares to $6.2 million in the same period last year.
This was partially offset by lower financial services revenue related to the lower dental equipment sales, we experienced in the third quarter.
Internationally technology and value added services internal sales growth increased by 7.5% in local currencies.
We continue to repurchase common stock in the open market during the third quarter barring 1.6 million shares at an average price of $62.48 for a total of approximately $98 million the impact of the repurchase of shares on our third quarter diluted EPS was immaterial.
Also note on October 30, Onest 2019, we announced our board of directors authorized the repurchase of up to $400 million of shares.
And that's on top of the $75 million that we have available at the end of the quarter. So in total we have $475 million available for future stock repurchases.
Second we look at some of the highlights of our cash flow, we had strong operating cash flow from continuing operations for the quarter, It was $226.4 million and that compared with $157.5 million into third quarter of last year.
We continue to believe we will have strong operating cash flow for the year.
We also note that we plan on implementing a new restructuring initiative in 2020.
The goal about initiative is twofold, one is to help mitigate stranded costs from some of the expiring transitional service agreements related to the animal health spud spinoff as well as to continue to look for more opportunities to save costs and drive operating efficiencies at this time, we do not have specific detail.
Yes on this initiative since they are in process of being developed.
But we will provide additional details on future earnings calls.
I'll conclude my remarks by noting that we're tightening our guidance range for 2019 non-GAAP diluted EPS at this time, we're not providing GAAP guidance as we are unable to provide an accurate estimate of the gain.
On the minority equity investment.
We just talked about that will be recorded in the fourth quarter again. This gain is subject to certain contingent consideration related to the transaction, which makes calculating it a little bit more difficult.
This guidance supersedes, both our GAAP and non-GAAP guidance that we previously issue.
Our 2019 non-GAAP diluted EPS from continuing operations attributable to Henry Schein ink is now expected to be in the range of $3.41 to $3.47 reefer, reflecting growth of 8% to 9% compared with the 2018 non-GAAP diluted EPS from continuing.
Operations, which was $3.17.
The outlook for 2019, non-GAAP diluted EPS from continuing operations excludes eight cents of estimated restructuring expenses and a one cent credits income tax expense related to the animal health spinoff.
non-GAAP guidance also excludes the gain on sales the minority equity investment, which will be recorded in Q4.
And it Ics and also a non-GAAP diluted EPS from continuing operations for 2018 exclude certain expenses and benefits netting to a charge of 30 737 cents per diluted share.
And you can see that as reflected on our previous earnings releases for 2018.
Turning to 2020, we are introducing non-GAAP diluted EPS for 2020 at this time again, we will not be providing GAAP diluted EPS as we are unable.
To provide an accurate estimate of cost related to the restructuring that I mentioned earlier 2020, non-GAAP diluted EPS from continuing operations attributable to Henry Schein is expected to be in a range of $3.65 to $3.75 and that reflects growth of 6% to 9%.
Compared with the midpoint of our 2019 non-GAAP diluted EPS from continuing operations, which is $3 and 44.
Dollars and 44 cents.
Our guidance for both 2019, and 2020, GAAP and non-GAAP diluted EPS attributable to Henry Schein, Inc. This where current operations as well as any completed or previously announced acquisitions, but does not include the impact of potential future acquisitions, if any or the restructuring expenses guidance.
Assumes foreign exchange rates are generally consistent with current levels and the guidance also assumes that end markets remained stable and are consistent with current market conditions.
Ill also note that our guidance assumes certain continued.
I see investment in three areas. One is a CRM. The second is European ERP and the third is our web interface development, we will continue to make investments in that.
In those three areas in 2020 with that said I'd like to now turn call back over to standard.
Thank you Stephen.
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.
Steven mentioned this was 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 consumable internal sales in local currencies grew 4.1%.
This was also faster than our estimate 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 9.2% in local currencies, and we did particularly well in the areas of implants in 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 a decline in high tech equipment revenue.
Traditional equipment sales grew at a healthy rate of 4.8%, we're particularly pleased with the outperformance on equipment sales in general.
As you May note one of our large dental manufacturing partners then start sirona.
Sales of key sales event early in the fourth quarter.
And we believe that portion of practices in the us held off on equipment purchases in anticipation of show promotions.
Last year. The show this event was in the third quarter of a gain of 2018.
This was an excellent sales event for Henry Schein, particularly for sales of high tech equipment and specifically.
Had cab an extra our imaging products more than twice as many of our dental customers attended the Dentsply sirona will compared to last year.
And we believe the strong participation to should translate into incremental dental equipment sales for Henry Schein in the fourth quarter and beyond that either.
As Steven mentioned, our current dental equipment backlog suggest improved fourth quarter dental equipment sales.
International dental equipment internal sales had a robust growth of 8% in local currencies in the third quarter. This is particularly encouraging given the.
Economies in certain markets that we operate showing that dentists are prepared to invest in their practices when the investment results in.
Improved return on that.
Profitability the practice, while at the same time, providing better quality care for patients that the practitioner is treating.
We know that investing in new dental equipment and digital technology can transform a dental practice through enhanced capabilities greater efficiency and increased patient satisfaction.
We look forward to working with strategic supplier partners.
Both mutual market share for those manufacturers, who continue to innovate and address cactus opportunities and challenges and who understand and appreciate the value that Henry schein to bring to those manufacturers of bringing that products to market. We continue to see opportunities to advance interoperability between.
Henry Schein, one and equipment manufacturers. This was really important a key part of the strategy of the Henry Schein one is to integrate.
Specifically dense digital dental equipment end to the electronic medical record and from there also advance.
Credit quality of care and patient demand generation over.
Over time, we believe that key demographic trends, including among the aging population in the developed world and expand and expanding middle class in the developing world.
As well as greater awareness of the link between oral care and our health will all drive dental market growth.
And specifically with certain products, and specifically with specialty products and digital dentistry with both our portfolio of solutions around helping dental professionals manage more efficient practices, enabling our customers to improve the overall health and wellbeing of their patients as the educate pay.
Patients about the oral.
Systemic connection the connection between good Okay and good healthcare in general the is a huge amount of data that has been published in the last decade, specifically in the last few years connecting.
The notion of good oral care with good healthcare in general believe we believe educational reinvigorate the dental practice with new on the services and reinforced the value of prevention and regular oral care as the general population understands that wellness and.
Eventually lead to a better life, a quality of life and of course lower cost in healthcare in general requirements and moved from sick care to healthcare.
Which is a good segue into our medical business, which is focused in the ultimate care section of medicine.
With a high focus on wellness and prevention.
We delivered solid internal growth in the third quarter of 5.3% in local currencies. Our medical team has both a reputation for excellence in serving small and large kale physician practices with the goal of enhancing patient care.
We have made many investments in our solutions and systems to optimize.
What.
Oftentimes highly complicated supply chain systems.
Needs for the office space practitioner of the ultimate care site.
Quite unique and we believe leak satisfy these customers in a rather unique way. Our goal is to think ahead of evolving of the and evolving medical landscape to best support patient focused care across the substitutes spectrum and this connection our continued to two.
Invest and technology to support these customers unique needs a great example of our forward thinking is our announcement several months ago of the availability of mid pods mobile dock to integrated with the health. This platform is designed to enable healthcare practitioners to conduct remote tell them.
Medicine examinations, but patients in non traditional care settings, such as home offices and schools.
We provide the vital sale the vital signs monitoring equipment.
Yes.
The vehicle so that the.
Practitioner is able to read engage.
The vital signs of the patients in the field.
We are helping to seek practices transform and improve relationships with patients looking for convenient access to care a key requirement of the younger generation as we invest in our teams systems and product offerings. We believe we will remain a trusted and valued partner to small.
Physician practices.
Large group medical practice specialties practices general practices.
And urgent care and Ambridge of care centers.
As they promote increase wellness and.
Prevention for their patients while at the same time servicing the ambulatory surgical center in the rather unique late.
Now, let's move to our technology and value added services business.
Henry Schein continues to evolve as a provider as a service provider shall we say as well as a resource for unmet selection of product and services. Henry Schein. One is an important strategic asset not only in a day today management practices, but also to drive both existing and prospective patients into.
Customers practices.
Over the years, we have successfully expanded our services beyond our world class distribution platform and practice management software into building a model to help practitioners better engage with and market their practices to patients and serve these practices in the end more efficiently.
And effectively in other words positioning our customers to provide better.
Healthcare, providing better tools to provide better healthcare, while bringing that.
To the attention of the public and their patients in general.
The Henry Schein, one platform exemplifies our service oriented solutions and last quarter, we delivered several new functional enhancements in practice management, we introduce electronic forms of consents as well as new practice workflow tools and patient engagement and types and acquisitions, we launched and express checkout.
One solution as well as a powerful new.
Appointment tool that allows practices to book opened appointment slots.
To help Dennis managed practices and maintain the full schedule.
And prioritize.
The procedures.
In conformity with the practitioners needs. We also offer online appointment booking through Dentrix ascend. This is our success for cloud based system and soon through Dentrix on traditional windows based system, allowing patients to book appointments on the practice website as well as through.
Thanks, and email text appointment reminders.
We.
Have a significant techs reminder, business around the world and actually quite uniquely in our international markets.
I mentioned last quarter that we're looking for new opportunities to cross sell our software solution with practitioners, who purchase our consumable merchandise and equipment, our Henry Schein, one and Henry Schein dental teams are increasingly engaged and working collaboratively to support our customers across our business.
Although it's barely a year old would continue to believe that Henry Schein, one represents a significant opportunity over the short medium and long term and expect to continue to enhance our product offering.
Before we open the call to questions I would like to comments on two important developments related to litigation.
First.
With regard to the recent decision.
By the FTC, we're gratified that the chief administrative law judge dismissed claims that Henry Schein conspired with competitors to approve void, providing discounts to buying groups, representing dental practitioners, which we've publicly denied from the start and a happy to do business with any.
With dentists in any fall had been committed to doing that for decades.
Secondly, we announced that in the case of.
Oh period litigation involving Summit County, Ohio, presently before the US District Court for the Northern district of the higher the plaintiff has agreed to dismiss Henry Schein with prejudice as a defendant.
Okay crisis is a terrible national tragedy, and we believe that all segments of society must come together to address this crisis.
Even before this litigation we had played a constructive role and look forward to continue to play a constructive role and helping to advanced solutions that puts and end to the tragic opioid addiction prices as such Henry Schein will make a million dollar donation to establish an educational.
Foundation Summit County to develop best practices regarding the proper use of prescription opioids.
We believe this world in the end be a benefit to practitioners.
Dental and medical and society in General.
Working summit County will make the nation to pain management Education Foundation.
Dedicated to making grants supporting and aggregating research around best practices for pain management.
Including a prescription of opioids and alternatives educating dentist physicians clinical associates patients and patients networks on those best practices, along with the risks of opioid addictions and alternative pain management treatment.
Opioid options to key in four key indications.
Henry Schein will also paid $250000 of summit County expenses.
[laughter] Henry Schein has a longstanding commitment to doing well about doing good.
And operating our business in an ethical manner ever we may operate throughout the world.
Team Schein looks forward to continue to serve all our customers and suppliers with excellence and integrity that is expected from us and at the same time, serving the needs of our investors and indeed society in general.
With that operator, we look forward to opening the call for questions.
Thank you if you would like to ask a question. Please press Star then one on your telephone keypad to withdraw question for Sapanski, We ask that you limit yourself to one question plus one follow up question to allow all callers a chance to pose your question.
Our first question is going to come from the line and Glen Santangelo Guggenheim.
Thanks for taking my question I, just want to comment on an underlying market growth rate trends into in the North American dental business. It looks this quarter you know the consumable business, obviously, we're facing a difficult four plus percent comp last year in the equipment business was obviously impacted by the timing of the Dentsply.
Hi 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 we just sort of peg the growth rates average.
Yeah, Glenn I think.
It's hard to be precise within basis points I wonder in a very narrow trading range, but if you kind of look at on the consumable side or we did in 2018 orbited 19 you.
Divide that too.
It's something like that maybe a little lower maybe a little higher but.
It's some deflation not a loss there is unit growth is about stable in general was.
Quite well.
Pretty good growth in the specialty areas and a number of a procedures. Some balance it's very hard to be precise on equipment. The market is quite healthy and weve often caution investors not to look at one or two quarters, but to take a look at.
The 12 month fourth quarter, something like that this quarter was a particularly unusual quarter, we actually had very good.
Traditional equipment sales.
One of two vendors that well, one or two vendors will not with somewhat challenged.
We.
Yup had some challenges with the CAD Cam and extra our imaging products.
But in that regard a lot of that is related to a particular supplier.
Dan splicing held their comps there.
Convention in the third quarter and with reported that we have a pretty solid backlog of equipment going into the fourth quarter. So I think it's very very hard to pursue the precise within basis points, but generally I think these markets are positive with.
Equipment being.
Quite good.
I'm not saying we were surprised with the part with a positive.
Developments on the traditional equipment side, but I think thats, 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 what's the surprisingly challenging the economy and most of our major markets.
We've done quite well and.
I think we did pick up market share, but the bottom line is practitioners are investing in the practices.
I appreciate the comments stand Steve, meaning if I could just follow up on the initial fiscal 20 guide.
I was just kind of curious are you assuming any change in.
The trend changes in any of those underlying market I know you specifically you know do not include any capital deployment in your guidance and you sort of called out the IP investments I was wondering if you could maybe size that in any sort of high level commentary to help us think about that initial guidance will be helpful. Thanks.
Sure.
So the 2020 guidance.
Assumes that market conditions.
Are pretty much consistent with where currently experiencing so we're still expecting us 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 cells event.
But we do have a little bit of headwinds in a couple of areas. One is in stranded costs.
Stranded costs in 2020 are expected to be greater than 29 team.
Right now we are estimating that they could be 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's still more work to be done to see how far we could reduce them.
But again right now the estimate is in the $10 million to $12 million range and there will also increased investment in the technology investments, we're not quantifying exactly how much that is.
But but certainly it's in the millions of dollars range of increased investments.
Part of that is.
It's going to be ongoing because some of those investments on not a one year event. There are multiple year event. So I think the step up in 2020, and hopefully that won't be as significant step up in future years.
We also assume from an 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, but a little bit of stock buyback in our guidance.
We're not assuming the full amount that that is authorized since it's difficult to predict exactly how much we will buy back in any given year.
Our next question will come from the line of John Locke Stifel.
Great. Thanks, guys. Good morning, nice quarter, unless you start with especially consumable number.
And how do you you gave a number around 9% or even know over LIBOR said, that's a big numbers. So.
Predominantly are all driven by end plans are there any incremental revenues coming from some of your other initiatives I guess, what im alluding to will be clear aligners anything that high single digit number from specialty can be maintained teams as we look forward.
Thanks, Thats China's submitted the question.
I think we've had line to wall Street on many occasions that our goal is of course to continue to make our.
Distribution business core business more efficient continue to grow market share satisfies the complexities of our customers, but growing some of the leaving the smaller customers that presents the dates and a value added services, but we have two key programs or three creek Pope initiatives initiatives to mitigate margin compression.
The first is specialty products, our Covenant amendment. The second is value added services and the third is expensed mitigation in other words driving efficiency in the practice, there's a slight bolus of net.
Challenge and that because we have the vectrus.
And.
TSA subsea say sales and the costly stranded costs that we have to deal with but now if you go into the specialty businesses, we have a relatively small market share.
And what we are.
Look we've shown to be successful is to combines the specialty products the niche products.
With the general merchandise and equipment, we sell and bundle that what the.
Practice management software, where we have leading positions and several of the specialty areas.
Yes, we believe with and 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 and implants and bone regeneration.
Yes. These are important positions we have great platform at very good know, how we have excellent facilities. The management is really superb and we believe we could continue now I cannot guarantee of course, not when can that we will have a 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 markets. 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's some opportunity there we have some unique products and we're doing well with a new unique products that market is not growing significantly, although it's probably somewhere bridge between stable and growing and a slight.
Decrease on the align aside I think we have a good product.
We have had a soft launch.
I think the product actually works and is pretty good.
I wouldn't want to make claims on this call, but I'm told that Barqueo Els at its a very good product and we are sharpening the related software for those areas and to support the aligner.
The various kinds of software to support the aligner and really believe we havent very good solution for the GPS in particular, because there's actually no reason to go to a direct to consumer company. If you can get a great product that really outstanding product.
Provided by definition.
At a slightly higher price not much higher so we believe we will do well eventually over time with the in the GPS and I believe the specialists are starting to appreciate our offering which is a little bit different to any of the markets offerings out there and we're not really looking to via generic compared to anyone.
Yes, there were looking to create our own demand for our own products in the specialty area. So yes, we do remain quite optimistic about the specialties areas and.
And who knows exactly it's impossible to predict but we believe that a greater part of Henry Scheins profits over the next few years leased. The next 3457 years will come from these specialty products and our own brand as well as working with certain branded manufacturers increasing their demands this sales of certain specialty products.
Great to have to color thanks for that and with the second question I'll just period over the medical business, the 5% and change in total is still well above industry, but the two year stack was about 10%. The past two years in 17, and 18 that two years to actually a lot closer to mid teen. So should we just think about the weight of your more.
I can share gains starting to diminish a bit in maybe that mid single digit plus type a number for medical is the better neighborhood to be in thanks for your time guys, Yes, as Glenn I think we've mentioned this before.
With respect to medical he 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.
Also bring us internal growth in IR. For example is a very nice product offering but acquisition growth, but will result in internal growth.
And then also has to be careful in looking at any one quarter. There's so many variables. We take flu for example, one year, there's a demand for flu test the other year, there's not one the flu vaccine has 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 the three four quarter basis, and again, we don't have a crystal ball, but we're pretty comfortable that we're position to deal with the or to service the transfer of procedures.
From the acute care setting to the offer to the office based or the surgery Center.
Environments or even the energy center environment and to gain further market share in that area and those are reasonably fast growing markets and we're quite comfortable in that we Scott a really outstanding management team that soon they are investing in software unique software for that for those markets and so with the acquisitions.
With that we will expect to have greater internal growth acquisition growth and continued to gain market share in a market that is growing.
It's hard to gauge one quarter at a time and hard to talk about whether this will be double digit growth or not but it's going to be at a decent market growth and will come true.
Net sales growth and we'll continue to add to our profitability in combination with all the other strategies, where we just outlined.
Our next question will come from the lineup, 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 rent 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 tenda cadence of equipment demand or selling on your part over the last few quarters relative to maybe a year or two about where we were.
Yes, Jeff. This is very good question I'm glad you asked but.
So.
In the quotas after we added.
Dentrix.
We added ceramic in particular, sirona, but sort of in particular.
We had a significant bulge in pent up demand that we satisfied.
That initial demand bulge has kind of.
Peter the out but at the same time, we're starting to gain I think market share within that category.
From customers that were introducing the ceramic and and related lines too.
So I think that's number one number two is and I think we've mentioned in the past the has been quite a bit of deflation with certain threed and twod and threed imaging equipment not units.
I'm 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 allows prove on their offering the price is likely to go up so taking us to into accounts and looking at end and at a aggregation of of the average.
Of say four quarters, I think we're I'm positive territory.
But.
And I do believe that practitioners are investing in the practices here and abroad and that technology can help practitioners operate a more efficient practice increased the profitability of the practice, while providing better clinical care.
And yes, there's also a little bit of price compression on Scanas senses, but overall I think this is a very good market and believe that we continue to gain market share in older markets where it.
Great that's helpful and Steve maybe as a follow up I, just on 2020 guidance I, 6% to 9% EPS growth that would imply unassuming anyway, a little bit of leverage in the model. In addition to maybe some repo and other.
Helpers below the low revenue line as well.
But I guess, what I'm trying to get at are hoping you can provide some color on is how should we think about margin gating next year. I know you don't guide on margins, but theres some leverage to be had in the model. It will we got business mix, it's an issue ERP investments restructuring.
Is it going to be mainly come through our backs where that margin can go up next year, a bad I and we should think about gross margins closer to how we may be seen at 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 coke sales to co vectrus under the TSA phase.
Is only down about nine basis points.
So so that's why we're providing that level of detail Jeff on the TSA sales. So people can look at our margins within without.
The co vectrus.
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're not expecting the full 20 basis points or more and 2020 of operating margin expansion because of some of the things we just talked about so.
Branded costs and other things.
We do believe that longer term, we can get back to that type 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're 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 Lynn William Blair.
Hi, guys.
So my first question is on Henry San Juan So it appears to still be driving meaningful growth in it and experiencing good customer uptake I guess from your vantage point, what do you guys really think differentiate the product at this point and given kind of feedback from customers that far from other competitors offering. Thanks.
Well.
It's very hard to do this on a telephone call and if this was an area where investors and interest and I really would hope investors would be interest at the best thing would be to attend.
Briefing all at one of the dental shows where we can show the product.
But clearly we have a very unique.
Cloud based system.
That is based on that sense that is based on dentrix, the leading windows based system, which is richer.
Features.
We believe that there's no other system that has all these features.
The system is also both those systems together with the three actually for specialty software systems that we have for also in the 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.
Large DS of all of these.
Unique needs of these customers in one way or another satisfied.
The software.
In addition, we have quite unique electronic medical record software that is interoperable with many suppliers not all suppliers yet because some suppliers are still having challenges developing a software to connect but most of so many of the leading suppliers are interoperable that's already in the areas of imaging.
And to some extent.
Digital prosthetics.
And then it move into the.
Various kinds of digital.
Exchange of information, whether its credit card processing patient financing.
And the big area, where we I think heavy quite an important market share is in various forms of demand generation, including risk mitigation software for web sites.
Web site management design. It is a large offering and an area that I think.
Is highly fractionalized from a competitive point to be I'm not sure if there's any one competitor.
That has anywhere near the aggregation of opportunities that we present that to slip and that of course is not only in the us 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 webinars for certain investors that we're looking for more information on Henry Schein, one and that Webinars is still up on the website. So people can view that it gives a lot of great detail on what surfaces. So.
And saw and I saw 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'll be happy to.
Answer those questions.
We could also if people want more detail on it we could also set something up.
Separately for group of investors, if thats, which launches.
The other thing I just want to add is you know to a Stanley said is I would say that no. One has it was kind of at the end of Stanley's remarks is 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're all connect with each other very seamlessly some of the new products.
Are still being connected better.
But I think that really differentiate us 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.
See first on the updated 2019 guidance.
Implies a fourq bps number that's roughly flat sequentially I.
I think in Fourq, you, usually see a bit oven.
The sequential growth just with it being a higher volume quarter and you also have the DS World shift. This year. So you could you can you maybe just talk about what's driving your expectations. There as we think about the cadence for Fourq you.
Yeah, I would say that yet Q4 is impacted the acute rave let me say at this where Q3.
Had a significant amount of favorable timing things that happened in Q3.
That will not repeat in Q4, so let me give some more detail to that so one is this department of defense contract.
Happened in Q3, we were expecting it to happen in Q4.
Two is there's a little bit higher stranded costs in Q4 versus Q3.
Three.
We did restructuring last year in Q4 of 2018.
And we won't have that same.
A year over year benefit in 2019, because we're not doing restructuring in Q3 in Q4, So I was little bit of foreign exchange headwind. This is a number of items, but I would characterize it all as.
Largely timing between Q3 in Q4, and that's why we maintained other than tightening the range for just one last 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.
And maybe more broadly just can you maybe talk about what you're seeing from these customers in terms of purchasing behavior and have you been able to kind of penetrate those customers with specialty products and is that what's driving some of the strength in this in the specialty businesses. The I cited earlier.
So.
[noise] anything that we are concerned about we are looking to add at customers in the dsos side.
So I would say that.
Our belief is that could be next year slightly more.
Upside and downside.
Of course, when we're 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 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 hours. So we feel we're in good shape and we feel that we'll continue to have a very strong market position on dsos going forward, but there is always there is always a renewals each year that are coming up again to 2019 included at least two renewals.
That I'm aware of.
And we do and we do continue to add new accounts, both in the large account area and.
And the midsize practices.
Thank you I'd now like to turn the call back over to Stanley Bergman for any final remarks.
Thank you operator, as we close todays call.
I would like to underscore that we believe we are executing well on our growth initiatives.
Our strategy and value proposition continue to resonate with our customers.
This is not a strategy that came together quickly it's a strategy a deliberate strategy that we've been executing on.
For the last three strategic plans each a three year plan.
Were half almost two thirds of the way through.
2018, 1920 plan, we will shortly start preparing the plan for 20 120 to 23.
Yesterday marked the 24th anniversary of IPO.
On a compound annual growth basis through the end of 2018, we grew sales by 13%.
And non-GAAP EPS from continuing operations buyer.
14%.
We've also provide 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 61, Threenine eight one of five.
We believe that we are well positioned as I noted for the future. We have a good track record I believe and outstanding management team.
With a deep bench.
19000 committed team schein members around the world.
And we look forward very much to the future.
I will be at the credit Suisse Healthcare conference in Phoenix.
And at the Greater New York Dental show both to November .
For our investors in Europe , we hope to see you at the NASDAQ Investor Conference in London in early December so there'll be ample opportunity to meet our executives in the field, but if you have any questions. Please feel free to coal Carla.
With specific questions or actually a bit visit our website.
So thank you for joining us today.
And look forward to speaking to on the next quarter. Thank you.
Thank you that will conclude today's Henry Schein Conference call. We appreciate your participation and ask that you. Please disconnect.
Okay.
[noise] [noise].
Okay.
Thanks.
Okay.