HSIC
#Thank you, <UNK>, and good morning to all
As we begin, I'd like to point out that our 2016 fourth quarter results include restructuring costs of $16.1 million pre-tax or $0.15 per diluted share
And our 2015 fourth quarter results include restructuring costs of $12.4 million pre-tax or $0.11 per diluted share
For the full-year, our full-year 2016 results also include restructuring costs
Those restructuring costs are $45.9 million pre-tax or $0.42 per diluted share and full-year 2015 results include restructuring costs of $34.9 million pre-tax or $0.32 per diluted share, as well as a one-time income tax benefit, net of non-controlling interest of $3.8 million or $0.05 per diluted shares
When I discuss our results as reported on a GAAP basis and also on a non-GAAP basis, the non-GAAP basis will exclude the restructuring costs and the one-time tax benefit in the prior year
We believe that non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparisons of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business
These non-GAAP financial measures are presented solely for informational and comparative purposes, and should not be regarded as a replacement for the corresponding GAAP measures
You can see Exhibit B in this morning's earnings release that has a complete reconciliation of those non-GAAP adjustments
Okay, let me also point out that the fourth quarter of 2016 included one additional selling week compared with the fourth quarter of 2015. This week is the holiday week between Christmas and New Year's
We report on what's called a 52/53 week fiscal year ending always on the last Saturday in December
So, the next time our results will include an extra selling week will be in 2022. So, in order to facilitate more meaningful comparisons, we will provide a separate estimate
We are providing a separate estimate of the impact of the extra week on our sales growth, as well as providing internal sales growth in local currencies excluding that impact
Okay, so turning to our results now
Net sales for the quarter ended December 31, 2016 were $3.1 billion, reflecting a 9.5% increase compared with the fourth quarter of 2015. Our internally generated sales, in local currencies, were up 4.2%, acquisitions contributed 1.3%, there was a 1.5% decrease due to foreign exchange, and the growth attributed to this extra week was estimated at 5.5%
You could see all of these details of our sales growth contained in Exhibit A in our earnings news release
Our operating margin, on a GAAP basis, for the fourth quarter of 2016 was 6.9% and contracted by 18 basis points compared to the fourth quarter of 2015. There are three key elements that negatively impacted our GAAP operating margin that I'd like to discuss and these three key elements negatively impacted operating margin by about 30 basis points in total
The first item relates to acquisitions completed during the first 12 months and the related expenses as well as switches between agency sales and direct sales in our Animal Health business which combined to negatively impact the contraction by 7 basis points for the quarter
Secondly, influenza vaccine sales this year had a lower margin compared to the prior year, which negatively impacted our operating margin by 15 basis points
And the third item relates to an increase in restructuring costs in the fourth quarter of 2016 versus the same period last year and that negatively impacted the contraction by 8 basis points
If you were to exclude the net impact of these three items, our operating margin expanded by 12 basis points
Our reported GAAP effective tax rate for the quarter was 28.4% that compares to 30.1% in the fourth quarter of 2015. The tax effect of the restructuring costs recorded in the fourth quarter increased our effective tax rate by about 20 basis points in 2016 and about 30 basis points in 2015. Our full-year 2016 effective tax rate was 28.8% on a GAAP basis and, again, the effect of restructuring costs recorded for the full-year increased the effective tax rate by another 20 basis points in 2016 and 30 basis points in 2015. For 2017, we expect our effective tax rate to be in the 28% range
I'd also like to note that in 2017, we are implementing a new accounting standard called ASU 2016-09. This new accounting standard requires excess tax benefits associated with stock-based compensation to be recognized as a reduction in income tax expense in the period which the stock awards vest
As a result, we expect our effective tax rate to be favorably impacted in 2017 and this will primarily occur in the first quarter as this is when most stock-based awards at Henry Schein vest
This impact will occur each year in Q1 and will have varying effects on the annual effective tax rate
Therefore, because of this, we expect our Q1 effective tax rate to be in the range of 23% to 24%, this is for Q1 only
And we still expect that this Q1 impact is included in our estimated effective tax rate for the full-year which, on a full-year basis, will remain in that 28% range
Our net income attributable to Henry Schein, Inc
on a GAAP basis was $139.2 million or $1.73 per diluted share
That represents increases of 7.1% and 10.9%, respectively, compared with the fourth quarter of 2015. Excluding restructuring costs, non-GAAP net income attributable to Henry Schein for the fourth quarter was $151.3 million or $1.88 per diluted share
And that represents increases of 8.6% and 12.6%, respectively, compared with the fourth quarter of 2015, also on a non-GAAP basis
I'd like to point out that foreign exchange negatively impacted our diluted EPS for the quarter by approximately $0.02 and this was partially offset by share repurchase benefit of approximately $0.01 for the quarter
So, let's now look at some detail on our sales results for the fourth quarter
Our Dental sales for the fourth quarter of 2016 increased 7.7% to $1.5 billion
Internally generated sales in local currencies were up 1.6%, acquisitions contributed an additional 1.7%, there was a 1% decrease due to foreign exchange, and growth attributed to the extra week was estimated at 5.4%
We look at North America, our North American internal growth in local currency was 2.2% and included 1.9% growth in sales of dental consumable merchandise and 2.7% growth in dental equipment sales and services revenue
As I mentioned last quarter, there was some acceleration of our equipment sales from Q4 to Q3 and that was associated in part with promotional activities that we discussed on our last conference call
It's also important to note that we saw strong growth in the North American consumable merchandise and equipment sales in December, even excluding the estimated impact of the extra week
I'd also like to reiterate that our growth rate was impacted by the decision to stop selling precious metals earlier this year
This is something we've also talked about on the last few conference calls
This decision negatively impacted our North American dental consumable merchandise sales growth in the quarter by about 50 basis points and this will continue for one additional quarter – first quarter of 2017, at which time it will annualize
International dental internal growth in local currencies was 0.7%, included 2.5% growth in sales of dental consumable merchandise, and 3.9% decline in dental equipment sales and service revenue
This decline was primarily due to a difficult prior year comparison in international equipment sales and service revenue
We also expect the softness in international dental equipment sales to continue in Q1 as we approach the IDS trade show, which is in late March, and anticipate an acceleration of equipment sales thereafter
On an overall basis, we continue to believe we outpaced the global dental market in Q4 and believe the fundamentals of our business strategy remains strong
Turning to Animal Health sales, they were $837.8 million in the fourth quarter, an increase of 10.8%, internally generated sales in local currencies was up 8.2%, acquisitions contributed 0.4%, there was a 3.4% decrease due to foreign exchange and growth attributed to the extra week is estimated at 5.6%
The 8.2% internal growth in local currency has included 10.3% growth in North America and 6.3% growth internationally
When normalizing for Animal Health results to account for the impact of certain products switching between agency sales and direct sales, that 8.2% internal local currencies was 7.8% growth and included 9.3% growth in North America
We believe this normalized growth rate is a more meaningful reflection of the ongoing performance of our North American Animal Health business
These were solid results as we believe we continued to gain market share both domestically as well as overseas
Our Medical sales for the quarter was $621.1 million for the fourth quarter and that was an increase of 10.6%
Sales growth in local currencies was 4.4%, all internally generated, with 0.1% of small decrease due to foreign exchange, and growth attributed to the extra week estimated at 6.3%
It's important to note that timing of influenza vaccine sales negatively impacted the Medical sales growth by 1.2%
And if you exclude this impact, our sales growth in local currencies was 5.6%
Of this 4.4% growth, 4.5% was in North America and growth of 0.9% in local currencies internationally
We are pleased with our Medical growth as we also believe we gained market share in this business unit
Technology and Value-Added Services sales were $112.2 million in the quarter, an increase of 19.6%
That consisted of internally generated sales in local currencies, up 8.5%, acquisitions contributing an additional 9.8%, and a decrease due to foreign exchange of 1.9%
And finally growth attributed to the extra week is estimated at 3.2%
Of that 8.5% internal growth in local currencies, 7.4% was in North America and 13.9% growth internationally
The Technology and Value-Added Services internal sales growth in local currencies was highlighted by solid growth in both our software services revenues in North America as well as internationally
We continue to repurchase common stock in the open market during the fourth quarter, more specifically we repurchased approximately 1.3 million shares during the quarter at an average price of $156.10 per share and that equated to approximately $200 million
The impact of this repurchase on shares for the fourth quarter was positive by about $0.01 per share
For the full-year of 2016, we repurchased $550 million of our stock, representing 3.5 million shares at an average price of $158.88 per share
And while this was above our originally stated goal, we saw an opportunity to be more aggressive when our stock price declined
Our share repurchase program continues to demonstrate our long-term commitment to create further value to shareholders and reflects our confidence in long-term prospects of the business
At the close of the quarter, Henry Schein had about $250 million authorized for future repurchases of our common stock
And we continue to believe that our capital allocation strategy, which deploys a large of portion of annual free cash flow to both repurchases and acquisitions, continues to drive increased shareholder value
Let's briefly look at our balance sheet and cash flow, operating cash flow for the quarter was $264.5 million
That compares to $298.3 million last year
For the year, the operating cash flow was over $600 million – $615.5 million to be exact
Our CapEx for the year was $70.2 million and that results in free cash flow of $545.3 million for the year
As I mentioned earlier, we are really pleased to have exceeded our goals related to cash flow for the year
Accounts receivable days outstanding was about 41.3 days
That compares to 39.3 days last year
Our inventory turns was 5.5 turns for quarter
That compares to 5.6 turns last year
And finally, I'd like to conclude by reaffirming our 2017 guidance for the year
Our diluted EPS attributable to Henry Schein is expected to be $7.17 to $7.30 for 2017. I'd like to point out that if the U.S
dollar continues to strengthen, we may come in at the low-end of this range
And obviously, we can't predict well what's going to happen with the U.S
dollar so we just wanted to point out that we do have sensitivity to the U.S
dollar strengthening
We'd also like to note that we have concluded our restructuring program
We do not expect to have any further structuring expenses in 2017. And as a result, there is no separate guidance on a non-GAAP basis since we will not have any non-GAAP EPS for the year
That guidance reflects growth of 16% to 18% compared to 2016 GAAP diluted EPS, and 8% to 10% compared to 2016 non-GAAP diluted EPS
As always, the 2017 diluted EPS attributable to Henry Schein is for continuing operations as well as completed or previously announced acquisitions, but does not include the impact of potential future acquisitions, if any
And as I said earlier, guidance assumes foreign exchange rates are generally consistent with current levels
So with that overview, let me turn it back over to <UNK>
I would say similar comments internationally
Markets are stable, they're consistently growing
Historically, we've always seen the international markets grow a little bit slower than the U.S
They're a little bit more comparable at the current time
We absolutely believe we're gaining market share in international dental
So, I would say that steady-as-she-goes and I think that the consistency in the market should continue going forward
Now, of course, that the consumable comment, you know we do have lumpiness related to equipment and the IDS show that we talked about
So, IDS, typically people delay purchases in this current quarter to see new models and new show specials for equipment later in the quarter and that turns into sales in Q2 and Q3. So, we'll see some lumpiness there on international dental equipment sales
I think that's exactly right
We weren't expecting to buy back as much as we bought back
In hindsight, it turns out to be even a good – a very good short-term decision
But longer term, we expect it to be even a better decision because we do have high confidence in the business
The foreign exchange has been a headwind
It has been a headwind for 2016. It's still a headwind for 2017. And because of the unpredictability of foreign exchange, those two kind of counteract each other
Okay
So, I would say there's no significant variance that I've seen between large DSOs and middle market
It seems to be more across the board, although we personally are seeing stronger growth in our middle market
That's an area that we have keen focus on
But I think the overall market is relatively consistent
As you know, <UNK>, we've seen periods of time, so we're optimistic where December and January will continue, but there's no certainty in that
We've seen times where – again, lumpiness in sales
But right now, things seem to be pointing to a slight acceleration in the U.S
dental market
And remember just one other thing, <UNK>
that's consumable comment
Equipment, on the other hand, because of the strong December that we had and because of Section 179, which typically pulls sales forward from Q1 into Q4, you have to expect that Q1, you'll see lighter equipment sales because of that tax benefit that pulled forward
And that's a bit of a timing thing that should occur each year now going forward given that the Section 179 is now permanent
We're still a little bit perplexed as to why it occurred
And <UNK>, actually, I think, in his comments said something similar to that
There's really no additional data points that we've seen that give us any greater clarity as to why it happened
We just know it did
And again, hopefully, the long-term prospects of the dental market will continue to be favorable
The demographics are still on our favor, people taking better care of their oral healthcare, aging population, all of that
So, I wish, <UNK>, I had a better answer but we really don't have more clarity on that
So, you're correct in – for Q4, the extra week was a little bit negative
I haven't calculated the exact amount, but was a little bit negative to overall Q4 operating margins
Again, the main reason is it's a light week for sales
And with two-thirds of our expenses being compensation and compensation-related, you get a full week of compensation
So, margins were a little bit lower there
On full year 2017, yes, our guidance does assume at least 20 basis points of operating margin expansion and it's correct to note that's on what we like to call same-store basis, meaning it excludes the impact, if any, of any acquisitions that could be positive or negative to that number
But we do believe that there's still room for margin expansion going forward
Sure
We'll start with the last part first
The 2017 guidance really only assumed a very modest improvement in end market conditions, not just for Dental, but for all of our markets
So, it was more consistent, but with some slight improvement
February, we didn't comment on because when you start segmenting months and looking at it in a particular week-by-week basis, you really couldn't get misleading results
But we don't think – we wouldn't have said December and January unless we believed that there was potential for it to continue
But looking at the specific weeks, it's too short a period to really draw conclusions from
