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Henry Schein Inc (NASDAQ:HSIC)
Q2 2018 Earnings Conference Call
Aug. 6, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Henry Schein Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the 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.

Carolynne Borders -- Vice President of Investor Relations

Thank you, Ray, and thanks to each of you for joining us to discuss Henry Schein's results for the 2018 second quarter. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward-looking statements.

These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission. 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. The contents of this conference call contain time-sensitive information that is accurate only as of the date of the live broadcast, August 6, 2018. 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 that we have allotted.

With that said, I would like to turn the call over to Stanley Bergman.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Thank you, Carolynne. Good morning, everyone, and thank you for joining us today. We are quite pleased with our results for the second quarter, which reflects solid revenue growth in general healthy end markets as well as our continued success in gaining market share in all of our business groups. We are in the early stages of executing on our new strategic plan for 2018 through 2020, yet we're already making solid strides in expanding our offering of innovative solutions and extending our value proposition for our customers. We are indeed excited about the potential for our new dental technology joint venture Henry Schein One, which closed on July 1. This joint venture was created to deliver integrated dental technology that combines leading practice management, marketing, and patient engagement solutions into one connected management system.

Our medical business remains highly relevant as, of course, reflected by our continuous and sustained growth in sales and market share. We are on track with our efforts to prepare for the planned spin-off of our global Animal Health business with Vets First Choice and a combination with Vets First Choice, which will create a new publicly traded company to be named Vets First Corp. We believe this transaction will unlock shareholder value for Henry Schein shareholders as Vets First Corp. will be well positioned to achieve a premium market valuation. In addition of course, we believe Henry Schein will continue to drive further growth in our leadership positions in our dental and medical businesses as a result of our sharp focus and, of course, increased investment of resources.

We are focused on the development of practice management and clinical solutions that are highly relevant to our customers and we have been successful as a result of our commitment through our high touch value-added approach, which has advanced our brand equity. We are committed to the strategy long term and we believe it will continue to advance our brand equity and accordingly, shareholder value. Our strong relevance to our customers also means a continued focus on accelerating innovation within our dental, medical, and animal health platforms, particularly with dental -- with digital dentistry. And we remain agile embracing an operating culture that is fast, it stays true to our values, and our collaborative and entrepreneurial spirit.

With exciting changes taking place at Henry Schein this year, we are at a pivotal moment as we drive forward with innovation that we believe distinguishes our go-to-market strategy and will help our customers operate a more efficient practice so the practitioners can deliver quality clinical care. I would also note that we are providing more details today on our comprehensive restructuring plan designed to increase profitability by improving business efficiencies, reducing redundancies, and optimizing Henry Schein's infrastructure. Steven will walk you through those details; but first, I would like to comment on why we are undertaking this initiative. By continuing to streamline our operations, we expect to create a leaner organization that will allow us to better serve our customers' rapidly changing needs and our ability to continue to build shareholder value. These changes are difficult to make. However, we recognize they are necessary to enable Henry Schein to continue to build upon our success as well as to deliver solid long-term financial returns to our shareholders.

Now, let me ask Steve to review our financial results, restructuring, and guidance. And then I'll provide some additional commentary on recent business performance and our accomplishments. Steven?

Steven Paladino -- Chief Financial Officer

Okay. Thank you, Stanley, and good morning to all. As we begin, I'd like to point out that I will be discussing our results both on a GAAP basis and also on a non-GAAP basis. Our Q2 2018 non-GAAP results exclude restructuring costs of $14.9 million pre-tax or $0.07 per diluted share as well as transaction costs related to the planned Animal Health spin-off of $7.6 million pre-tax or $0.05 per diluted share. Also, our Q2 2017 non-GAAP results exclude a litigation settlement expense of approximately $5.3 million pre-tax or $0.02 per diluted share. 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 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. For a reconciliation, see Exhibit B in this morning's earnings release as well as on the Investor Relations section of our website. So, now turning to our results. Net sales for the quarter ended June 30, 2018 were $3.3 billion reflecting an 8.7% increase compared with the second quarter of 2017 with internally generated sales growth in local currencies of 4.8%. When also excluding the impact of certain products switching between agency sales and direct sales, which impacts both our Animal Health and to a lesser extent our technology businesses in North America, our normalized internal sales growth in local currencies was 6.1%. You could also see the details of our sales growth on Exhibit A of our earnings news release.

Operating margin for the second quarter of 2018 was 6.1% and contracted by 83 basis points compared with the second quarter of 2017 as a result of a few factors. Our operating margin in the second quarter included restructuring costs as well as the transaction costs related to the planned Animal Health spin-off and the prior year included litigation costs. These three items combined to negatively impact year-over-year operating margin comparison by 50 basis points. Excluding the impact of these items, our operating margin contracted by about 33 basis points year-over-year. The operating margin in the second quarter was negatively impacted primarily by lower gross margins in North America. We do have as a priority a plan to increase sales of higher margin products to drive gross margin improvements across our businesses.

We believe we can enhance our offering with additional technology as well as other practice management solutions while advancing our specialty products businesses, our Henry Schein brand, and our other exclusive products and brands just to name a few areas of focus. These initiatives will take a little bit of time and the investment -- and investments of the return will be not recognized immediately, but we believe we can make good progress toward these goals this year as we execute on our 2018 to 2020 strategic plan. Our reported GAAP effective tax rate for the second quarter of 2018 was 24.9%. This compares to 28.7% of our GAAP effective tax rate for the second quarter of 2017. On a non-GAAP basis, which excludes the income tax benefits of the restructuring and spin-off costs, our effective tax rate was 24.1% and this compares to 29% for the second quarter of last year, also on a non-GAAP basis.

We believe our full-year 2018 effective tax rate will be in the 24% range. Moving on. Net income attributable to Henry Schein Inc. was $141.2 million or $0.92 per diluted share on a GAAP basis representing a growth of 3.8% and 7% respectively compared to the second quarter of 2017. Non-GAAP net income attributable to Henry Schein Inc. for the second quarter of 2018 was $159.8 million or $1.04 per diluted share and this represents growth of 14.7% and 18.2% respectively compared with the second quarter of 2017. I'd also like to provide some additional color on our results noting that amortization from acquired intangible assets was $30.2 million pre-tax or $0.15 per diluted share for Q2 2018. And for the first half of the year, amortization from acquired intangible assets was $61.3 million pre-tax or $0.30 per diluted share. Also note that foreign currency exchange had a positive impact on diluted EPS for the quarter of approximately $0.01 per share.

Let me now provide some detail on our sales results for the second quarter. Recall that Good Friday fell in Q2 last year compared to Q1 this year. This resulted in one additional selling day in Q2 of the current year in several major countries internationally and I'll discuss those details in a moment. Dental sales for the second quarter of 2018 increased 8.4% to $1.6 billion with internal growth in local currencies of 4.4%. Our North American internal growth in local currencies was 5.1% and included 4.7% growth in sales of dental consumable merchandise and growth of 6.2% in sales of dental equipment sales and service. The impact on dental consumable merchandise sales growth related to Good Friday was relatively immaterial at approximately 15 basis points.

Our international dental internal growth in local currencies was 3.4%, which included 3% growth in sales of dental consumable merchandise, which was favorably impacted by approximately 1% due to the timing of Good Friday and our growth in dental equipment sales internationally was 4.7%. Our Animal Health sales were $985.9 million in the second quarter, an increase of 10.6% with internally generated sales growth in local currencies of 4.4%. The 4.4% internal growth in local currencies included 3.2% growth in North America. However, when normalizing for the impact of a manufacturer switching from a direct to an agency agreement, sales growth was a robust 10.9%. We believe this double-digit normalized sales growth for the quarter reflects a healthy end market. International Animal Health sales growth in local currencies was 5.8% and was favorably impacted by approximately 1% due to the timing of Good Friday.

We have a commitment to gain market share through our offering of a wide range of products and providing relevant value-added solutions, which is reflected in the continued success of our global Animal Health group. Turning to medical. Our medical sales was $614 million in the second quarter representing an increase of 7.5% with internally generated sales growth in local currencies of 7% and that 7% included 7.1% growth in North America and 4.9% growth internationally. We are very pleased with our overall medical sales results, which is primarily driven from solid organic growth from existing large customers. Technology and Value-Added Services sales were $113.8 million in the second quarter, an increase of 4.9% with internally generated sales growth in local currencies of 3%.

In North America, Technology and Value-Added Services had internal sales growth of 1.7% in local currencies or 2.2% growth when normalized for again certain products switching between agency sales and direct sales. Our international sales, local internal sales growth was 9.3% and was strong across the board highlighted by double-digit growth in both financial services and dental software revenue. We continued to repurchase common stock in the open market during the second quarter. Specifically, we repurchased approximately 744,000 shares during the quarter at an average price of $71.69 per share representing approximately $53 million. The impact of this repurchase on our second quarter results was immaterial. Also at the close of the second quarter, Henry Schein had approximately $147 million authorized for future repurchases of our common stock. If we look at our operating cash flow for the quarter, the operating cash flow was $287.8 million compared to $228.7 million last year. We continue to believe we will have strong operating cash flow for the year.

Now I'd like to walk you through some additional details on our planned restructuring. We recently announced this initiative to rationalize our operations and provide significant expense efficiencies. Periodically, we look to reduce costs, particularly following a number of acquisitions as we have done in the past. Accomplishing this through a coordinated effort is the most efficient means to reduce and realize cost optimization. As we noted last quarter, we are looking at opportunities to augment our technology solutions to generate improved efficiencies across the business, particularly with redundant activities resulting from prior acquisitions. In an effort to create a lean organization, there will be some headcount reductions. They may also include consolidation of certain warehouse and other activities in order to eliminate such redundancies although we always consider it a benefit if significant enough to warrant the amount of resource and attention and cost that is associated with these transactions.

These actions will allow us to execute on our plan to reduce our cost structure and fund new initiatives that we believe will drive future growth under our 2018 to 2020 strategic plan. We expect to record one-time restructuring charges in 2018 of between $45 million and $55 million on a pre-tax basis or $0.22 to $0.27 per diluted share. These restructuring charges primarily include severance pay, facility closing costs, and outside professional and consulting fees directly related to the restructuring plan. We expect the savings from these restructuring initiatives to have an average payback in about 18 to 24 months after the completion of these assets. I'll conclude my remarks by noting we are raising the bottom end of our 2018 non-GAAP diluted EPS guidance range.

At this time, we are not able to provide estimates for the impact of total costs related to the planned Animal Health spin-off in our 2018 financial results. Therefore, we are not providing the corresponding GAAP guidance. Note that our 2018 guidance is based on current revenue recognition standards and we do not believe that the impact of the new revenue recognition standard ASC 606 will be material to our results. So, 2018 non-GAAP diluted EPS attributable to Henry Schein is now expected to be $4.06 to $4.14 reflecting growth of 13% to 15% compared with the 2017 non-GAAP diluted EPS of $3.60, and this is versus our prior guidance of $4.03 to $4.14 per share. The guidance includes costs related to our previously announced one-time cash bonus to certain designated staff members and excludes costs related to the restructuring and planned spin-off of the Animal Health business in 2018.

2017 non-GAAP results exclude costs related to taxes associated with the US tax reform legislation, a loss associated with Henry Schein's divestiture of the equity ownership in E4D Technologies, and a litigation settlement expense in 2017. The guidance assumes that end markets remain stable and are consistent with current market conditions. Also, our guidance is for continuing operations as well as completed or previously announced acquisitions and does not include the impact of any potential future acquisitions. This guidance also assumes foreign exchange rates are consistent with current levels. Following the close of the Animal Health spin-off, Henry Schein expects to deliver EPS growth for the remaining consolidated Henry Schein business in the high single-digit to low double-digit percentage range. We expect to update our full-year guidance for the remaining business once the spin-off closes.

So with that, I'd like to turn the call back over to Stanley.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Thank you very much, Steven. Let's review some business highlights from our second quarter 2018 results. In our dental business, we of course are pleased with our 4.7% internal sales growth in local currencies in our North American dental consumable merchandise business, which was the highest quarterly growth rate since the fourth quarter of 2015. This growth in part reflects a favorable comparison versus the same quarter of 2017. We continue to believe the end market is stable and we have benefited from market share gains. North America dental equipment internal sales in local currencies grew by 6.2%. Dental equipment sales growth was solid with a number of our key manufacturing partners in the second quarter of 2018, including KaVo Kerr, Midmark, and A-dec.

With respect to Dentsply Sirona equipment sales in North America, we continued to make good progress in the second quarter and have been pleased with the overall product line ramp in the US as part of our strategy to offer our customers a wide selection of choices to meet each clinician's unique practice needs. Looking at our equipment categories. Local internal North American CAD/CAM sales were up 35%. Overall North American high-tech equipment sales were relatively flat since strong CAD/CAM sales growth was offset by soft digital X-ray sales or imaging sales. We believe the soft digital imaging sales are primarily due to higher market penetration, although we expect this market to still be a very solid market in the years to come. On a global basis in local currencies, CAD/CAM sales grew by more than 28% that's on a global basis, and our dental implants business grew at approximately 5% on an organic basis.

Looking at the international business, we believe the end markets in Europe, including Germany, our largest European dental market, are stable. We are benefiting from our dual-market approach in offering full service as well as telesales and e-commerce distribution capabilities in many European countries. In understanding the specific needs of our customers, practice size and focus with a general dentist or specialist and delivering solutions for those needs; we create close relationships with our customers. I think this is such a key component part of our success and it really needs to be appreciated and understood by all of our constituents. In May, we announced the launch of our SLX Clear Aligner System and we have been very pleased with the progress to date. We just started taking orders toward the end of the quarter, so we're still early in our launch process. The feedback to date from customers and KOLs, the key opinion leaders, network has been quite positive.

The goal of our Clear Aligner solution is to reduce overall treatment time while improving practice efficiency. We believe there is significant and growing global market potential for Aligner products. We see this market as still growing nicely and we look forward to building our Aligner business as we launch our system in the United States to a great extent through the balance of 2018 and we expect to expand in new geographies in the earlier part of 2019. Now, let's talk about the Animal Health group. We are pleased with the global Animal Health sales in the second quarter, particularly in North America with normalized internal local currency growth of approximately 11%. Our team is working diligently to prepare for the spin-off of our global Animal Health business and the simultaneous merger with Vets First Choice to create, as noted earlier in the conversation, Vets First Corp.

While we are working toward the goal of closing by the end of calendar 2018, it is possible that the closing may slip into the first quarter of 2019. We believe that Vets First Corp. will provide veterinarians with a powerful new platform to grow their practices, of course through improving client engagement and of course driving better healthcare outcomes for pets. Following the close of the transaction, Henry Schein plans to continue to pursue a wide array of growth opportunities in the broad-based dental and medical business as we implement our 2018 to 2020 strategic plan. Our focus will remain on delivering innovative solutions that enable customers to deliver best quality care while increasing the efficiency of our customers' practices, including driving greater patient traffic and enabling technology and equipment interoperability, it's very important. Our medical business also continued to perform well with high single-digit growth in local currencies.

Our customers rely on our consultative high-touch model, which helps them adapt to the evolving healthcare environment while remaining nimble and efficient as the enterprises grow. Our strong supplier relationships and supply chain expertise are central to our strategy and have enabled us to grow our medical business more rapidly than end market growth. Our success is driven by a differentiated strategy including customer segmentation, value-added solutions, and our strong brand equity. We have deployed customized account management models to effectively service healthcare systems, ambulatory surgical centers, emergency medical services, urgent care clinics, and independent physicians' offices with products, services, and yes, solutions that are highly relevant to their practice.

Moving on to our Technology and Value-Added Services businesses. We announced early in July that we closed on our joint venture to form Henry Schein One, which is a new dental technology and service company offering one connected technology platform for innovative software, hardware, and services. Henry Schein One is integrating our solutions into one practice management system that connects office technologies, so office digital solutions are seamlessly integrated, share more data, and automate more tasks. Our plan is to offer bundled software packages to our customers starting with implementing Demandforce and Officite products into our Dentrix and Easy Dental software packages. In the coming months, we plan to continue to add additional bundles to our practice management solutions, and for example, bundling software solutions such as Sesame for the specialty dental practices.

So, I would like to spend a few minutes discussing the cornerstone of our strategy and a key differentiator to our business, which is our portfolio of value-added solutions. We have received feedback from investors that the investment community would like better to under -- would like to better understand what those solutions are comprised of and how these value-added solutions will have an impact on our business results. While many competitors seek to compete on low prices only and often with a limited selection of products, we offer competitive pricing while also providing the broadest array of products and solutions and support that help customers operate a more efficient practice, so commissions can deliver quality care. Really, really important strategy that we've had in place for decades and it has worked so well for Henry Schein.

Our high touch value-added model is focused on 4 key elements; education, service support, software and innovation, and finally, strong customer relationships. Our offering expands beyond supplies and equipment to business solutions, technical service, digital technology, and practice management and clinical solutions. Our practice management and clinical software capabilities are differentiated by our continued investment in customized tools that address specific practice challenges. We have an industry-leading presence with more than 40% of dental practices and more than 55% of animal practices in North America using our practice management solution platform and a significant installed base of many international markets -- in many of the international markets. This software is a backbone to efficient practice operations of how the clinical records and processing e-claims to credit card processing and patient reminders.

We take a holistic approach to developing system interoperability in the practice to ensure an efficient and seamless end-to-end workflow. For instance, Dentrix enterprise is designed to work with more than 40 medical solutions -- software solutions and dozens of equipment supplier solutions and systems. It also easily shares data with other solutions providers used by a practice. Through Henry Schein One, we expect this portfolio to continue to expand and particularly the offering of powerful tools to help the practitioner operate a more efficient practice so that the practitioner can focus on providing the best of clinical care. Let's discuss another key element in our value-added approach, the benefit of our Connections loyalty program, popularly known PRIVILEGES. When customers elect to partner with Henry Schein for a majority of their annual consumable merchandise, equipment purchases, we'll award our customers with services that are highly valuable to them.

In fact, today, approximately 60% of our North American dental consumable sales including DSO sales are associated with the Connections program. Benefits of the program include exclusive discounts. With our loyalty program, customers receive exclusive discounts and competitive pricing on consumable merchandise and equipment exchange for volume commitments. Really important to understand this, often missed the pricing we give our dental customers is a real advantage. Guaranteed response time on emergency repair. Generally our service technicians will be made available same day for emergency repair services for our Connections customers. Customized practice analytics. The data we collect from our practice management solutions, we are able to customize reporting based on specific practice operations that help dentists improve efficiency and of course the key byproduct of that is generate increased patient traffic.

Last year alone, we reviewed more than 5,000 of these customers' -- customized reports with our dental customers helping better position those practices competitively. This reporting assists with filling analysis, new product procedures such as dental implants, orthodontics, and digital prosthetics, and enhancing patient communications; to name a few. And there's our Concierge [ph] Service, our elite customers are assigned an internal VIP account representative who is trained to provide one call convenience for the patient, whether for assistance with product deals or core special services. We have over 4,200 highly trained field service consultants value-add supported by over 2,200 sales service representatives that stay abreast of the market development and hundreds of new products, services, and technologies that are introduced to the market each year.

Our goal is to provide customers with most extensive array of consumable merchandise pharmaceutical equipment and value-added services from software to financial and office design services, all delivering a high level of customized service and support. These field sales consultants are supported by specialists focused on different practice style, specialties, equipment, and software and the largest and most effective telesales organization in the business.

With that, operator, we like to open the call to questions.

Carolynne Borders -- Vice President of Investor Relations

Ray, let's go ahead and start the Q&A.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Jeff Johnson from Baird. Your line is open, please ask your question.

Jeffrey Johnson -- Robert W. Baird & Co. Incorporated -- Analyst

Thank you. Good morning, guys, and congratulations on the nice improvement in the dental numbers. Steve, on that dental point, I guess my question is on the general consumable side. Any further color you can provide as far as, did market strengthen during the quarter? Was there any change in DSO versus your private practice business? And, maybe any commentary around general consumables versus some of the specialty stuff?

Steven Paladino -- Chief Financial Officer

Sure. So, I don't think the market really changed in any significant way during the quarter. We did take more market share I believe. To be fair, we did have a little bit of an easier comparable last year. But going forward even post-Q2, we did see continued strong revenue growth in the consumable merchandise in North America. So, we're executing well. Dental specialties did help a bit because they were in the mid-to-high single-digit growth rate so it was growing a little bit faster than the general consumables. But again overall, I think market very stable and we're really executing well and taking some market share.

Jeffrey Johnson -- Robert W. Baird & Co. Incorporated -- Analyst

That's helpful. And then as a follow-up question, just on the minority interest. You bought out, I think, the remainder of the vet minority interest shares in a couple of different businesses. When was that complete? Is the minority interest line we saw at about $6 million reduction, is that a fair way to think about going forward? And the corollary on that, if it is, it looks to me like embedded in your guidance then is that margins may be down a bit still in the second half of this year, we were thinking they might be closer to flat. So, can you maybe help us connect kind of the moving parts there and buying out those minority interests and how to think about margin over the back half of this year? Thanks.

Steven Paladino -- Chief Financial Officer

Sure. The benefit from minority interest will be a bit greater in the second half because we -- it's basically composed of two areas. The first is the Henry Schein Animal Health buyout of the minority interest, which is only a partial quarter benefit because we did it during Q2. I think it's sometime in the April or early May time frame we did it, we completed it. So you'll get a full quarter benefit in Q3 and Q4. And the second piece of it was related to what we did at the beginning of this year. We bought out BioHorizons, so that is a full quarter benefit in Q2. But we do feel like we can continue to get that benefit again going forward on a full quarterly basis. Margins, margins have a lot of different moving parts. So we may be a little bit lighter than we originally planned on operating margins, but we still feel good with the overall business and the overall growth and that's why we are raising the bottom end of our guidance.

Operator

Thank you. Your next question comes from the line of Ross Muken from Evercore ISI. Your line is open.

Ross Muken -- Evercore ISI -- Analyst

Good morning, guys. So maybe on the just pricing environment in general, I mean. How would you kind of characterize it against the separate subgroups of sort of consumables, specialty consumables, instrumentation on the dental side? And any notable differences, US versus international, just teasing back to kind of the margin commentary?

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

I think, Ross, it's fair to say that pricing pressures are there to some extent. Of course, the Internet provides a vehicle for an exchange of information. I don't think it results in more orders going to online and retailers per se, but there is a little bit more openness on pricing. I wouldn't say it's material. But what this does at the same time is offer us an opportunity to talk to the customer where price is important about corporate brands and other competitive offerings from certain manufacturers. So, the manufacturers are responding generally with competitive pricing and this is both in dental and medical. I wouldn't say it's that much in the pharma side of the Animal Health. But in medical and dental, I think the manufacturers are understanding that in order to maintain or grow their market share, they have to be competitive with a product that is not really massively innovative. And so this is marginal, but I think in the end as we drive more high margin products and value-added services, I think we will continue with expanding our operating margins, of course, in conjunction with the efficiencies that we're bringing to our business driven by an implementation of more technology.

Ross Muken -- Evercore ISI -- Analyst

Excellent. Thank you.

Operator

Thank you. And your next question comes from the line of John Kreger from William Blair. Your line is open.

John Kreger -- William Blair & Company -- Analyst

Hi. Thanks very much. Stan, can you just maybe go back to the comments you made at the beginning of the call about the new strategic plan for 2018 through 2020, and just maybe expand on that a little bit to the extent you're willing. What's new in the plan versus the prior three years and is there anything specific in there relating to medical since you've made a couple of big moves in dental and Animal Health? Thanks.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Yes. Let me just go quickly to the medical. First, we are committed to human healthcare essentially from a high level strategic point of view. 18% of GDP is expended on healthcare, two-thirds of that is in the non-communicable diseases area, which is essentially driven by and can be reduced by wellness and prevention programs. This has always been at the heart of Henry Schein's medical business. The ultimate care environment, the best place for wellness and prevention to take place moving out of the hospital, the surgery centers and this is an area we expect to continue to advance. Of course organically, it has showed very good growth there. We have some very good opportunities ahead of us, sometimes a bit more lumpy, but essentially this business has done well for years now and we expect it to continue to do well. And inorganically, there are opportunities to add to that platform, I think the profitable businesses that service the ultimate care side. So, we remain optimistic.

As far as the strategic plan is concerned, there are three major planks. The first is to continue to drive efficiencies and make our distribution offering more attractive to our customers and much of this is the plan to deal with it, but because -- it's simply because of time. But Carolynne or Steven can take you through the details. There are many, many component parts of this, some are just an extension of what we had in the 2015, 2016, and 2017 strategic plan. Other planks are a greater focus on newer offerings, expanding the offering. Of course, I think what is important here is an understanding of where technology is heading and how to use technology in our business. Lots and lots of technological opportunities, we can't afford them all, but we have to focus on what is relevant and I think we have some very, very good plans to increase the efficiency and effectiveness of our distribution business.

The second is an expansion of value-added services. I would say a significant down payments of that toward that goal is the creation of Henry Schein One where we are offering not only leading practice management systems in this country and abroad, but also the demand generation software in combination with the practice management system for small, mid-sized, large; for institutions, dental schools. And the goal here at the end of the day is to increase efficiency in the practice helped with clinical services, make it more efficient, and drive traffic into the dental office. So, that's a key part of the second strategy. But also a huge number of value-added services that we'll be expanding on or that we're going to continue to expand on and add to in the years to come. And the third is advancing our brand equity. We think the Henry Schein brand is well known, it's trusted. We think we can advance in that regard on our private brands and other exclusive products.

And in particular on the specialty side where we've made sort of certain terrific advancements on our own brand products either with manufacturing on our behalf or where we're vertically integrated. So, lots of opportunities in advancing high margin products under our own brand or brands that we have a control over as well as exclusive and we're working with many manufacturers in that regard as well. The whole brand equity strategy is of attraction to many manufacturers. So it's those three areas; advancing the core distribution business, focusing on value-added services, and advancing our own brand strategy. None of these are new strategies. These have been put in place several years ago and it's a matter of just advancing and providing significant focus, which is the reason why we believe that we needed to spin-off the Animal Health business, which has a different need of focus, different concepts, different opportunities, and with the cash we're going to generate from that spin-off, we will be able to invest in both the animal health -- medical business and the dental business on a global basis.

John Kreger -- William Blair & Company -- Analyst

Very helpful. Thank you.

Operator

Your next question comes from the line of Kevin Ellich from Craig-Hallum. Your line is open.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Thanks for taking the question. Stan, just wanted to follow up on that. I mean clearly with $1 billion to $1.25 billion, which area seems the most attractive in medical or dental and would that be domestic or global? And then for Steve, Animal Health business remains very strong. Can you give us a little color on the competitive landscape and did you say that it could -- the spin-off could slip into early 2019?

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

The first question, what will you do with the money? So, what we'll do with the money will be very, very simple, similar to what we've done in the past. Some of it will go toward buying shares back. It's the way we put certain cash to our investors, it's worked out very well for us. It's relatively a cash-free -- cash effective way of getting cash into the hands of our shareholders and as I said, has worked well. The remainder, there will be a little bit that goes into working capital, but I don't think much because we expect to be significantly cash flow positive. So, a majority will go into investing and the investing will be based on the strategy opportunity, but also the best return on investment opportunities in the short to medium term. I would say this would be in the medical and dental space geographic expansion, greater market penetration on the distribution side, value-added services for sure.

We think that the Henry Schein One platform presents huge opportunity to expand our presence in the digital community, specifically in regards to getting patients into the dental office. There's a small dental plan already in there, we think we can add to that and a number of software and other opportunities as they relate to the software area, but then -- and of course, the specialty area as well. And adding to that specialty platform are areas that -- although we may sell the products; whether it's in medical, orthopedics or diagnostics or for the specialties like dermatology which are doing well, aesthetics; to add a greater variety of products, specialty houses to the platform. The opportunities are endless and the question is to focus. As our Vice Chairman, Jim Breslawski, always says we can do anything but not everything. And so, we will be focused on the most strategic, but also on the most accretive opportunities for the medium to -- short to medium term.

Steven Paladino -- Chief Financial Officer

Just on the second part of your question, Kevin. So, no real significant changes in the competitive landscape that I'd bring to people's attention. And the second part of your question on Animal Health, we did say that it is possible that the spin closes in early Q1. We're still shooting for late Q4 closing. The thing that we really can't predict with great certainty is how long it will take the registration statement to go through SEC and how long it will take to respond to whatever comments the SEC has and that's why because we can't control that and that could be a reasonably short process or a longer process depending on their questions and comments. So for that reason, we say it's possible it could slip into Q1.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Thanks, Steve.

Operator

Your next question comes from the line of Erin Wright from Credit Suisse. Your line is open.

Erin Wright -- Credit Suisse -- Analyst

Great, thanks. In Animal Health, did you see an incremental impact at all from weather-related items, I guess, in the quarter from the delayed flea and tick season? Should we anticipate continued strength in the third and fourth quarter? If you could give us a sense of the quarterly progression and the underlying demand trends you're seeing, that would be great. Thanks.

Steven Paladino -- Chief Financial Officer

Sure. Probably had a little bit of help given the warm climate in parts of the country, but what that does is it typically means that the flea and tick season is a longer season that's starting earlier. So, hopefully that helped a little bit. But overall, we still feel good about the end markets and our ability to gain market share in Animal Health and the flea and tick season will continue in Q3 and a little bit into Q4.

Erin Wright -- Credit Suisse -- Analyst

Okay, great. And then on Clear Aligners in particular, can you speak to kind of the opportunity, how you kind of stack up relative to the competition there and then what sort of contributions are embedded in your expectations near term? Are just more of a longer-term contributor? Thanks.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Right. We are not providing specific guidance nor are we contemplating significant profits in the near term. This was the launch of our new product offering, which is based on the Sagittal First Motion 3D system. It uses a unique combination approach with an intuitive and simpler treatment process, whether from minor crowding or cases requiring more extensive work to correct the issues. Our system addresses the correction upfront with the Motion 3 system, a three to four month process before the Aligner is introduced. As a result, we believe fewer Aligners are needed. So, this is part of a comprehensive solution and we believe it's a competitive solution. Some of which require 60 -- very often 60 to 80 sets of Aligners for complicated case versus ours, which we believe will be 20 to 30 and we believe ours is competitively priced. The bottom line is it's a new idea. It does use Aligners. We believe we have a significant number of KOLs that are supporting this, it's been well received.

But it is just one product offering, one value-added solution within hundreds within Henry Schein. We are very optimistic. Orthodontic team are highly capable, highly qualified that worked on this for a long time. So we are not giving projections right now, but are very enthusiastic that our whole orthodontic offering as part of our general specialty offering of implants and bone regenerations and endo will continue to move along in a nice way and is the base -- is in general the basis for our statement that we'll be moving to more -- over time to more high margin products that I think will provide greater stickiness to our customer base. So, no specifics on contribution of profits. We're just excited to launch and are extremely happy with the reception that our orthodontic team have received from the KOL network. But remember, it's not a pure Aligner product. It's a combination product that we believe will in the end be very effective and will continue to be well received as more patients use this product.

Erin Wright -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Steven Valiquette from Barclays. Your line is open.

Steven Valiquette -- Barclays Capital -- Analyst

Great, thanks. Good morning, Stan and Steve. So, a couple of quick ones here. You mentioned a 18 to 24-month payback on the new restructuring once completed, I guess just to clarify. Are you able to comment on whether you're capturing any material benefit from the restructuring in the back half of 2018 in particular? Does it have a positive impact on the 2018 non-GAAP EPS guidance?

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Yes. On that there will be some benefit we believe, but it's a little early for us to quantify the benefit that will be in the second half because again the completion and the timing of those activities is still being calculated. But we do expect some benefit in the back half of the year as well as going forward. And it has very attractive returns even at the high end of 24 months, still very attractive returns. And it's important for us again to do a combination of lower the cost structure as well as free up dollars for ultimate investments.

Steven Valiquette -- Barclays Capital -- Analyst

Okay. And then just a quick gross margin question. The commentary hasn't really been consistent over time at least from some of your competitors on whether the dental gross margins are higher on consumables versus dental equipment. Just remind us where you shake out on that comparison again just without giving any specific numbers, but just which one is higher versus the other. Seems like the commentary has kind of been mixed over time throughout the industry. We're just curious where that stands for you guys today? Thanks.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Yes. For us, we've been consistent. Our gross margins are higher on the consumables and equipment. They're both very good gross margins, but relative to each other the consumables is a bit higher. So I'm not sure what you're hearing from other industry sources, but we've consistently said that.

Steven Valiquette -- Barclays Capital -- Analyst

Okay. That's helpful. Thanks.

Operator

Your next question comes from the line of David Larson from Leerink. Your line is open.

David Larson -- Leerink Partners -- Analyst

Hi. Congrats on a good quarter. Can you talk a bit about your plans to drive higher gross margin like the in-sale of Henry Schein brand products or some tech investments and other areas? Thanks.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Sure, David. Thank you for your question. I'll give you some high level and maybe Steven can provide more color. First of all, it follows really our strategic -- the three planks of our strategic plan. On the distribution side, the goal is to move toward high-value products. There are some branded manufacturers working with us and some private brand manufacturers working with us. In other words, more value for the customer products where we're receiving manufacturer support in driving margins. At the same time, driving efficiencies in the business to drive up the -- drive down the cost and drive up the operating margin. So, all of that goes into the first bucket. The second bucket of course is our value-added services. And on the dental side, a huge focus on Henry Schein One. This team has been busy now for over a year working on the integration or the plans for the merger and now the integration.

They've not been focused on sales much, they've not been focused hugely on margin management, but on bringing this significant integration into play. Just with the team last week and it's really excited. The opportunities to use AI, big data, small data some call it to advance the practice, to drive traffic into the practice, to drive demand for dentistry, working of course with the Internet brands, ownership of WebMD. All very, very exciting opportunities that will drive sales stickiness, but high margin. I think we've indicated in prior press releases that we expect over the next two to three years to generate $20 million -- $20 million to $30 million of increased profits in this business. Our team is very optimistic. And then the last and the third bucket is our own brands, which includes of course the private brand and then in the specialty areas where we manufacture products, but also have products manufactured for us.

We're doing quite well in the implants area. Expect to do -- to have some strategic additions to that platform hopefully in the not too distant future both in implants and bone regeneration areas. We're doing very well in those two areas. On the endodontic side, bringing innovation to market, but also having a very good position in the lower priced, also good product, more generic endodontic treatment arena, lots of opportunity there. And then the orthodontic space as we described with Aligners, but also with our core orthodontic offering which have really done very, very well from an innovative point of view and are now gaining market share in this country and we expect to gain market share abroad. So, you add all of that together and that's what's going to drive it.

Of course what brings this all together across the company is the advancement of digital, technology, interoperability, bringing all three businesses together, lots and lots of opportunity to really have a one-stop one Henry Schein solution to our customers, that I think will drive up margins. And also the connection between our dental business and our medical business in advancing our wellness and prevention should all in the end drive up margin. This is a carefully thought out plan, no different to the previous years or previous strategic plans and we'll execute piece by piece and expect to continue as we have for the past 23 years as a public company driving up sales, operating margins, EPS, and yes, cash flow. Steven, anything to add?

Steven Paladino -- Chief Financial Officer

Yes, I think you covered it pretty fully. The only thing maybe I'll add is on the Henry Schein One. Those synergies that we noted, $20 million to $30 million by the end of the year three of synergies. A very high percentage of those are revenue growth and getting a deeper adoption of some of the services on to our software user platforms. So, that will drive higher revenue growth within the Technology segment as well as higher margins as those products get adopted. And similarly on the specialty products, we are growing the specialty products faster organically than the non-specialty products as we just talked about earlier on this call plus there is opportunity for inorganic growth from time to time in the specialty area. So, we feel good about continuing to move the mix toward higher margin products. We recognize that that's important for our overall financial model. So, those are the only two comments I had in addition to yours, Stan.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Thank you, Steve. Thanks for the question, David.

Operator

We have time to take the last question from the line of Jon Block of Stifel. Your line is open.

Jon Block -- Stifel Nicolaus and Company -- Analyst

Hey, guys. Good morning. I appreciate you taking the questions and fitting me in. Maybe two. First one, I'm going to actually tack on to Steve's earlier question on dental gross margins. I know you said consumable higher than equipment, but can you comment on call it consumable specialty versus basic. Just curious because it does look like specialty has been and may continue to grow faster than basic. And then I've got a quick follow-up.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Yes. The specialty margins are very, very good especially in the more mature businesses. For example, our implants businesses are quite profitable and we expect them to become even more profitable over time. We're investing, have continued to invest heavily in expanding that platform inorganically and through more efficient production capabilities. So, I think that's an area that has done well for us. The endodontics is more profitable and also not as profitable as the orthodontics, but much more profitable than the core distribution of dental products in general. Lots of opportunity there. And in orthodontics, we're relatively early in the game, but the profits are pretty good. When I say early, we've been in the business for about a decade, but we've only really seen the benefits from our investments in terms of management KOLs in the last few years.

But the margin is good and is expected to be greater. So on balance, this is a business that is much more profitable, the specialty areas than our core business. Having said that, remember a key part of our core business is also to sell traditional products to those specialists and that is also a profitable business and generally those specialists have a bigger wallet to spend money on for example equipment and yes, software. And then I would add one other thing, we're also advancing our software businesses in these areas. We announced although not closed our investment in a very successful orthodontic software business I believe that has the largest installed base of orthodontic software to supplement our endodontic very good installed base, I think the largest, and likewise with oral surgeons.

Steven Paladino -- Chief Financial Officer

Jon, just one other comment, want to make sure if I understood your question. My comment on gross margins being higher on consumables is true even after you exclude the specialty products. It becomes greater, the gross margin benefit, but it's true even excluding the specialty products.

Jon Block -- Stifel Nicolaus and Company -- Analyst

Got it. Very helpful. And the follow-up Steven for you is, can you just talk about at a high level where the margin compression may be coming from? And I'm just curious because the 6.1% adjusted internal growth was one of the stronger numbers in a while and then you also had some of the higher margin dental consumables that came back this quarter. So, wondering if you can call out a division or an area where some of that year-over-year margin compression came from? Thanks, guys.

Steven Paladino -- Chief Financial Officer

Sure. Well, clearly it's on the gross margin side and there are a couple of factors that we are continuing to invest in as we get future growth that goes into gross margins. So for example on equipment gross margins, our service technicians that do the repair and installation of equipment is shown -- that expense is shown as part of cost of goods sold. And as we make investments to expand the capabilities, especially since we expect to significantly grow our equipment, that's having some impact on the dental equipment gross margins. Similarly, in our Technology business, support -- technical support for Technology is a significant portion of technical support that is also part of cost of goods sold in the Technology business.

And again as we make investments in that area in anticipation of the ramp with Henry Schein One, you're seeing some impact in those two areas. You have to make the investment prior to the actual sales coming so that's why you're seeing a little bit of the impact on the lower margin this quarter and hopefully that will reverse itself as we get additional volume in future quarters.

Jon Block -- Stifel Nicolaus and Company -- Analyst

Very helpful, guys. Thank you.

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

So, operator, I think we need to end the call now. So, let me make some closing comments. We are of course pleased with the results for the first half of 2018. We continue to advance our intellectual capital and the value-added solutions that we offer to our customers and I would say driven by a highly motivated team Schein. I spent a lot of time in the field in the last quarter from Asia to Europe to North America, and I'll say the morale is really good. This is a key differentiator in our go-to-market strategy. The fact that our team is so highly motivated in advancing plans to improve on our customers' practice efficiency, provide them with tools to provide better clinical care, and our customers rely on us as trusted advisors to understand their challenges and pain points. We're offering practitioner solutions and services to really help them manage their practice and achieve their goals. We have a lot of exciting strategic initiatives under way as part of our three-year strategic plan. I believe we're highly focused, the team has motivated ourself as I've said and believed well positioned for another successful three years to execute another successful strategic plan.

So, thank you for joining us. Thank you for interest in Henry Schein. If you have any quick further questions, please feel free to contact Carolynne Borders in Investor Relations at (631) 390-8105. Steven is also available at (631) 843-5915. And look forward to speaking to you again when we report our third quarter numbers and results and performance in November. So, have a good rest of the summer. Thank you very much.

Operator

This concludes today's conference. You may now disconnect.

Duration: 67 minutes

Call participants:

Carolynne Borders -- Vice President of Investor Relations

Stanley Bergman -- Chairman of the Board and Chief Executive Officer

Steven Paladino -- Chief Financial Officer

Jeffrey Johnson -- Robert W. Baird & Co. Incorporated -- Analyst

Ross Muken -- Evercore ISI -- Analyst

John Kreger -- William Blair & Company -- Analyst

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Steven Valiquette -- Barclays Capital -- Analyst

David Larson -- Leerink Partners -- Analyst

Jon Block -- Stifel Nicolaus and Company -- Analyst

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