漢瑞祥 (HSIC) 2007 Q3 法說會逐字稿

Good morning ladies and gentleman, and welcome to the Henry Schein third quarter 2007 conference call.

At this time, all participants are in an listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the call, please press star followed by zero on your touch-tone phone.

As a reminder, ladies and gentlemen, this call is being recorded.

I would like to introduce your host for today's call, Susan Vassallo, Henry Schein's Vice President of Corporate Communications.

Please go ahead, Susan.

Thank you, and my thanks to each of you for joining us to discuss Henry Schein's third quarter results.

If you have not received a copy of the earnings news release issued earlier this morning please call 631-843-5937 and a copy will be faxed to you immediately or of course, you can obtain a copy on the website at www.henryschein.com.

With us this morning is Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein, Steven Paladino, Executive Vice President and Chief Financial Officer, and Neal Goldner, vice-president of investor relations.

Before we begin, I would like to point out that certain comments will include information that is forward-looking.

As you know, risks and uncertainties and may affect the matters referred to in forward-looking statements.

As a result, the company's performance may differ from those expressed and/or indicated by such forward-looking statements.

Also, these forward-looking statements are qualified in their entirety by the cautionary statements in Henry Schein's Securities and Exchange Commission filings.

The content of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast, November 1st, 2007.

Henry Schein undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances after the date of this call.

I ask that during the Q&A portion of today's call you please limit yourself to a single question before returning into the queue.

This will provide as many listeners as possible the opportunity to ask the question within the one hour we have allotted the for the call.

I would now like to turn it over to Mr.

Stanley Bergman.

Thank you, Susan and good morning, everyone.

And of course, thank you for joining us this morning.

We are very pleased with our third quarter results which once again reflect strong double-digit sales growth and market share gains in each of the four major business units.

Our dental group continued its trend of mid-teens growth while our medical, International and technology groups each posted sales gains well in excess of 20% for the quarter.

Worldwide internal sales growth was 13% for the quarter.

So the strength of the business throughout our various business units remains very, very strong.

We remain very, very excited about the future.

We feel our strategies are good, and we feel that our team is executing well.

In a moment, I will review some the highlights of the quarter with you, give you a glimpse of some of the thoughts for the future.

But before I do that, let me ask Steven Paladino, our Chief Financial Officer to give you an overview of our quarterly financial performance.

Steven?

Thank you, Stanley.

Let me begin by saying that I too pleased to report very strong financial performance for the third quarter.

Let me begin by pointing out all of the current year prior information has been restated to reflect the oncology pharmaceutical and special pharmacy businesses as discontinued operations and excludes those business from the detail of the income statement.

We recorded an additional loss on discontinued operations a quarter of $1.1 million or $0.01 per diluted share, and this relates primarily to the completion of the sale of the oncology pharmaceutical business which was completed during the third quarter.

During the fourth quarter we expect to complete the sale of the specialty pharmacy business that we discussed on last quarter's call.

So for purposes of comparability I will discuss the results from continuing operations without discontinued businesses in both the current and prior periods.

Our net sales for the quarter ended September 29, 2007 were $1.5 billion, reflecting 20.8% growth over the third quarter of 2006, or 18.3% growth in local currencies.

Thirteen percent of this growth was internally generated while 5.3% was acquisition growth primarily due to the acquisitions of Dunlop's, a leading UK animal health products supplier, as well as our acquisitions of Darby Medical and Darby Dental Laboratory and certain Becker Parkin businesses.

You can find the details of our sales growth in exhibit A of earnings news release.

Our operating margin from continuing operations for the third quarter of 2007 was 6.4%, 140 basis points higher than the operating margin from continuing operations in the third quarter of 2006.

This was the result of continued leveraging of our higher sales volumes across our established infrastructure as well as higher influenza vaccine sales versus the prior year's third quarter.

However, it is important to note that our operating margin excluding flu vaccine sales also improved by approximately 100 basis points.

Our effective tax rate from continuing operations for the quarter was 34.1%, that compares to 35.1% in the third quarter of 2006.

This quarter's tax rate includes both an one time benefit related to the lower corporate tax rate in Germany, offset by a one time expense related to certain European tax restructuring.

We expect our effective tax rate to remain in the range of 34% to 35% for the balance of 2007 and for 2008, we expect our effective tax rate to be in the range of 35% to 36%.

Our third quarter income from continuing operations was $60.7 million which represents growth of 54.6% from the prior year's third quarter.

Earnings per diluted share also from continuing operations for the third quarter of 2007 were $0.66 per share, reflecting an increase of 50% over the third quarter of 2006.

Included in this figure for the current quarter is a $0.02 per share gain related to the disposition of certain non-core businesses acquired through the Becker Parkin transaction that we previously talked about.

Now, I would like to provide some detail on the sales results for the third quarter.

Dental sales for the third quarter of 2007 were $617 million representing 14.6% growth in U.S.

dollars and 13.8% growth in local currencies.

10.4% of this local currency growth was internally generated and approximately 3.4% was due to acquisitions.

Our consumable merchandise sales were 9.9% ahead of the prior year in local currencies and 6% of that growth was internally generated.

Our dental equipment sales were 25.9% ahead of the prior year, also in local currencies, with 24.1% internally generated.

Our dental equipment growth reflected strength in both the basic traditional equipment as well as high tech products.

Medical sales were $445 million in the third quarter up 25%; internal sales increased by 22.5% and 2.5% growth was from acquisitions.

During Q3, we sold approximately 7.3 million doses of flu vaccine and that represents sales of approximately $78 million for the quarter.

Through yesterday, we have sold approximately 12.5 million doses of influenza vaccine.

And it is important to note that excluding the sales of influenza vaccine, our medical sales growth was very strong increasing 9% for the quarter with 6.9% internally generated.

Last quarter we announced the discontinuation of the oncology pharmaceutical and specialty pharmacy businesses.

In addition, we expect to shed sales of certain other low margin pharmaceutical products by year-end 2007.

We estimate that these additional products will account for $140 million of sales in 2007 and this will remain in our continuing operations.

It stays in our continuing operations because it is not a business that we are divesting it is just shedding certain sales to customers.

By eliminating these marginally profitable projects from the portfolio it will allow the medical team to focus all of their efforts on driving profitable revenue growth in the office-based physician market.

Turning to our International group.

Sales for the third quarter of 2007 were $412 million, that is up 25.7% over the prior year.

Growth in local currencies were 17.4% and with 6.9% internally generated and 10.5% acquisition growth, primarily due to the acquisition of Dunlop's that I mentioned earlier.

Foreign currency exchange contributed 8.3% to our International sales growth.

We are pleased with the strong internal sales growth in local currencies from the International business.

Turning to technology and value added services segment -- our sales there were $31.8 million and were 29.5% ahead of Q3, '06 with 29% in local currencies and 0.5% growth related to foreign currency exchange.

Of that 29% local currency growth, 15.5% was internally generated and 13.5% was from acquisitions.

We saw very strong revenue growth in electronic services business, our software sales business as well as our financial services business during the quarter.

We now take a look at some of the highlights of the balance sheet and cash flow.

Operating cash flow for the quarter was $9 million -- that compares to $64 million from the prior year's third quarter.

And our year-to-date operating cash flow was $150 million and compares to $65 million on the year-to-date basis and the prior year.

We continue to expect to achieve strong operating cash flow for the year and that should be in excess of the net income.

Accounts receivable day sales outstanding from continuing operations was 42 days from the third quarter and reflects improvement of about 0.6 days from the third quarter of 2006.

Inventory turns also from continuing operations for the third quarter was 6.9 turns and that was an improvement of about one half turn compared to the third quarter of last year.

Our return on committed capital was 34.7% from continuing operations.

And that compares to last year's return on committed capital of approximately 25%.

I want to conclude my remarks by discussing guidance.

First for 2007, we are affirming 2007 guidance from continuing operations and that is 2007 earnings per diluted share is expected to be in the range of $2.53 to $2.57 and remember, this guidance reflects the fact that during the quarter we reduced our contractual commit commitments for influenza vaccine to 15.5 million doses for the current year and that is down from 20 million doses previously.

This guidance also reflects strength in the core business for the first nine months of the year and $0.02 per share gain this quarter on disposition of certain Becker Parkin assets.

For 2007 EPS guidance includes all completed or previously announced acquisitions and does not include the impact of any future acquisitions, if any.

Now turning to next year, we are introducing 2008 financial guidance as follows: We expect 2008 earnings per diluted share to be in the range of $2.93 to $3.00 per share.

This represents an increase of between 15% to 18% compared with the mid point of our 2007 EPS guidance.

Also our 2008 guidance includes our expectation that we will distribute between 12 million to 15 million doses of flu vaccine during the year and that represents approximately $0.13 to $0.16 per diluted share.

This 2008 guidance is from continuing operations and also includes completed or previously announced acquisitions and does not include the impact of any potential future acquisitions.

Let me now turn it back to Stanley.

Thank you, Steven.

I would like to review some highlights from the four business groups with you this morning.

Let's start with dental group, where we are delighted to report continued strong performance during the quarter with mid-teen sales growth over the prior year.

Our dental group continues to be successful in building momentum, delivering profitable growth and expanding our presence in the marketplace as we successfully execute our long term strategy.

We did gain further market share in the consumable merchandise side of the business during the quarter and I am particularly pleased with the internal growth rate of 6% in local currencies.

We are also pleased with continued strength in our dental equipment sales and service revenues with very, very good internal growth of over 24% in local currencies.

Clearly, we are gaining market share in the equipment business which I believe is directly attributable to the execution of our strategies that we have been talking about for several years.

And with the contribution coming on the growth side from both basic equipment and some of the newer high tech product lines.

We saw good growth in both sectors.

We continue to be most optimistic about the long term potential of digital imaging including specifically the new Cone-beam technology products as well as of course lasers.

We also look forward to entering the exciting dental Cad/Cam market later in the United States when we begin to ship the E4D product.

With E4D, we are expect to distribute a highly competitive product offering with unique features and important user benefits.

And we believe the market is eagerly awaiting the roll out of E4D as evidenced by dentists' interest at the Henry Schein booth at the ADA trade show as well as recent visits to the E4D training center by opinion leaders in the cad/cam field.

When we begin shipping E4D, our primary goal of course is to insure that the initial user experience is highly positive.

We expect to ship the first units this quarter.

Last quarter, I discussed with you the purchase of the full service and special markets business of Becker Parkin dental supply which we did acquire in July.

During the third quarter we completed the integration of those businesses into Henry Schein and specifically of course into the Sullivan Schein US business and into the full service business of Henry Schein.

Let's take a look now, for a moment at our medical group.

The third quarter sales growth was 25% and we are pleased with the strong performance of the medical group during this quarter, which of course reflects the positive impact of the Medical One program.

We are being well received by the market place, and our higher sales of influenza vaccine among some other factors.

Let me now comment on the flu vaccine market.

Numerous groups are working hard to encourage Americans to receive a flu vaccine.

Indeed, through a public awareness cm campaign, the CDC has expressed the week of November 26th to December 2nd as influenza vaccination week and also November 27th has been designated Children's Flu Vaccination Day with a focus on vaccinating high risk children.

Through these actions, the CDC highlighting the importance of continuing flu vaccine through November and all the way through December, which historically has been late season months for inoculation.

At Henry Schein as in the past we stand ready to and valued supplier of flu vaccine to our customers until this product demand has been fully met.

On the International side, we are pleased with our success across the board and our International group.

Third quarter sales were up more than 17% in local currencies and reflect across the board claims in the United Kingdom, Italy, Spain and the Benelux countries.

During the quarter, we made a strategic acquisition that will significantly add to the European veterinary presence, namely the Dunlop's veterinary company in Scotland.

Dunlop's is a leading supplier of animal health products and services to veterinary clinics throughout the United Kingdom and with this acquisition, Henry Schein now serves medical, dental and animal health care practitioners across the United Kingdom following the model of our success in the United States and in Germany.

We are delighted to enter the UK animal health market in such a meaningful way.

Dunlop strengthens the European animal business, deepens our animal health management team and builds upon our recent acquisition of Provet in Switzerland, of course, Provet being Switzerland's leading animal health distribution entity.

Our animal health entity now spans six countries in Europe, including Austria, Germany, Portugal, Spain and Switzerland and the UK and we expect synergies with our U.S.

operations to unfold in the future as well.

And as a backgrounds, Dunlop was established in 1921 and offers comprehensive selection and 13,000 items including pharmaceutical instruments, equipment, and consumables.

Revenue for the fiscal year ended September 30th, 2007 was approximately $340 million.

In addition to growing this business, we see opportunity to improve Dunlop's operating margin over the next several years, as we reap benefits from the various synergies that Henry Schein will bring to the table both operationally and from an animal health products point of view.

With the addition of Dunlop's our worldwide vet business is now at a run rate of $700 million in annual sales, making us one of the leaders in the distribution of veterinary products.

Let's talk a bit about the technology and value added services business.

The technology and value added services sales were up nearly 30% in the quarter.

We did see broad based strength in this group including strong electronic services, software and financial services revenue growth.

We are particularly pleased with the acquisition of Software of Excellence, a loading supplier of practice management systems to more than 5,000 dental practices in the United Kingdom, Ireland and of course in Australia and New Zealand.

The clinical and the practice management software of Software of Excellence are important additions to Henry Schein and will support the objective to be a full service provider to our customers around the world.

Throughout the period of dialogue, and due diligence, during the acquisition of the Software of Excellence, we were impressed and gained even more credibility with the technical expertise of the Software of Excellence team.

They are committed to customer service and firm wide dedication to maintaining the highest standards of quality lined up very well with the Henry Schein goals and we just find this acquisition to be a perfect fit with our value added software business in Utah that is now the leader in the North American marketplace.

We, of course, welcome the management team of Software of Excellence as well as the Cooper family with Dunlop's and these are in our view two terrific additions to the Henry Schein group.

So, in closing, Steven and myself of course will take questions but we are particularly happy to report also on the fact that on October 2, 2007 Henry Schein was added to the NASDAQ 100 index with index es one of the most widely followed stock market benchmarks in the world and includes the 100 largest financial companies traded on the NASDAQ stock market as measured of course by market cap.

So, naturally in overview of Henry Schein, of our third quarter, we really feel strong about our businesses, about our strategies, about the morale in the company and generally about the progress we have made.

So, we are now ready, Steven and myself, to take any questions that you might have.

Thank you.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Steven Postal with Lehman Brothers.

Thank a lot and good morning.

I have a clarification question, a financial question and then a follow up.

Steve, can you elaborate on the net impact of the two tax items and how that on a net basis impacted you?

Sure.

The two tax items again, first, there was a change in the tax rates in Germany and that caused us to have an one time benefit of approximately $3 million included in the effective tax rate, but there was also some tax restructuring that occurred during the quarter and there was an additional tax expense for a similar amount, about $3 million that happened during the third quarter.

So the overall effective tax rate isn't impacted because they offset each other by those two factors and I just talk about both of them since I think a lot of people are aware of what is going on in Germany and the tax rates.

Then a question on flu vaccines, what drove the decision to decrease the guidance to 15 million doses.

It is my understanding, it sounds to me like you may still have some product on back order and you are selling it right now.

What is the change relative to when we last heard from you?

Well, we decided a little while ago, that given the amount of supply that is available in the market that in order to mitigate risk in order to have very high confidence and sell all of our product and reduce commitments for products.

And you know, we feel very comfortable that the commitments that we now have, 15.5 million doses doses for 2007, given that we already toll about 12.5 million of the doses.

We feel very confident that we will be able to sell the remainder in the next few or several weeks.

And that was really a decision to mitigate risk.

Steve, that must speak to the flexibility that you apparently have in these contracts with suppliers.

Well, you know, I would rather not, for competitive reasons, go into the contracts and which manufacturers we did this with.

It is important for investors to know what our commitments are now and the confidence level in achieving that.

Okay.

Thanks a lot.

(OPERATOR INSTRUCTIONS)

Next question comes from the line of John Kreger with William Blair and Company.

Hi.

Quick question for Steve.

Can you talk about the decline in gross profit margin compared to a year ago.

I am guessing that was driven by mix, but if you can elaborate, that would be helpful.

You are exactly right -- the gross margin did decline a little bit.

It was 20 some odd basis points on the year-over-year basis.

But let me tell you what it is not related to -- it is not related to any pricing pressures or not related to any unusual things in the market.

It is solely related to mix within our products.

There is nothing you know, that we are concerned about with the gross margin and obviously, we had very strong leverage on our infrastructure expenses and we improved our operating expenses as a percentage of sales and by over 160 basis points getting that margin improvement overall.

And again, there is really nothing going on with a pricing perspective that we are concerned about; in fact, prices remain very stable and very constant.

In general terms, Steve, could you talk about what categories in your portfolio tend to be lower margin versus higher margin.

For example, the step up and in the vet business, would that have been a driver down of gross profit?

Yes, the vet business does have a little bit lower gross margins.

Now, obviously if you look at our business units, technology clearly has the highest gross margins and next comes dental and medical and vet, including International, you know, are lower margins.

We look at the business really, with a shared infrastructure and we feel good about growing the operating margin because of the leverage we can have on the business.

Thanks very much.

(OPERATOR INSTRUCTIONS)

Next question is a follow up question from Steven Postal from Lehman Brothers and Company.

Okay.

Thank you.

Got back quickly.

Just maybe a couple of follow up questions.

You know, the company has grown substantially over the years, you know, throughout the world in various different businesses.

I guess a big-picture question.

Stanley, could you talk about how you managed that growth as the company has grown and how you plan on continuing to manage the growth as you go into different areas?

Yes, Steve.

Obviously, it is a very good question, by the way.

Obviously growth has been managed through management.

And I think we have invested significantly in management over the last 15 years and continue to invest in that area.

The way we are organized is that Jim Breslawski who is our president, and heads up and focuses on our North American businesses.

And in the North American business area, we have very good management that is developed over the years in the dental arena and in medical arena and most recently through an acquisition of NLS, on the veterinary side.

We have also focused very well on growing our management capability out in Utah with respect to our practice solutions business.

So, I would say that our growth is significantly driven and the results and the performance is significantly driven in North America by the unified management that Jimmy brings to the North American business and the various highways he has for the specific business units.

On the International side, the growth has been driven by of course Michael Zack in a similar capacity to Jimmy, but on the International side and a seasoned Henry Schein executive, just like Jimmy.

Jimmy has been with the company for 27 years and Michael, this is his 18th year with the company.

Michael has two managers reporting to him Norbert Orth for central Europe and Bob Minowitz for western Europe, the Middle East and Australia and knew Zealand.

Norbert and Bob Minowitz are also both very seasoned executives.

We have country managers underneath them that are very, very good too.

There is, what we refer to internally, as the third circle and that is the business development business which is headed up by Mark Mlotek.

And Mark, underneath him has a group of about 10 or so people that focus on business development matters whether it be acquisitions or exclusive or global vendor relations.

And Mark and his team have corresponding groups that they work with in the business units when it comes to integrations of acquisitions and delivery with commitments made with respect to exclusives and that works very, very well.

However, what I think is the critical differentiating feature with us and many other companies is that we have a highly centralized infrastructure that is led by Jerry Benjamin who has been with the company for almost 20 years.

So Jerry leads an infrastructure that is focused on IT, purchasing, general operations, delivery of operations, inventory management, the whole working capital scenario, receivables, payables, the regulatory side, the security side, in conjunction of course with our legal department.

This has worked extremely well, the centralized infrastructure; and, of course, Steven and myself at the corporate level provide corporate support.

So I think we have a very deep management team.

Perhaps there were a lot of questions over the years as to why we had so many.

And I think the depth and experience of our management team is something that has allowed us to build this growth platform that in fact supports the terrific growth and our growth calls for, as you know, 7% to 9% internal growth leading to earnings per share of 15%.

Those earnings per share turned into cash flow and increasing the earnings per share from internal growth further by acquisitions and by exclusive business development type of relationships.

So the formula we have been operating under for several years, perhaps for as many as 10 years has worked well for us.

Thanks, that is very helpful.

What is your sense regarding any impact to dental services spending in a slowing economy and I am referring to the implants and the lab business.

The implant business I think is of course, it could be slightly impacted I suppose by the, by any potential slowing of the economy.

And however, it is gaining far greater acceptance globally than than any, I think economic issue it would mitigate any moderate economic -- if it were a real depression, or something like that, who knows where it is going to go and if it were a slight taper in the economy, the momentum in the implant arena would overcome that.

On the lab side, there are many puts and takes there.

I think it would be hard to give you a comprehensive number, because a lot of new technology entering into the field.

And overall we still think it is a good business for us.

Overall, by the way, our implant business is doing very, very well for us.

A good acquisition for us.

Just a final question.

Steve, it looked like the minority interest allocation there went up substantially.

Can you talk about that?

Yes, it was a link to the last question.

Minority interest is up because of significantly increased profits, both in the catalog especially plant business where we own a majority interest 51%, as well as increased profitability in our Australian business where we also own a majority of 51%.

Interesting.

Thanks again.

Okay.

Your next question comes from the line of Jennifer Hills with Goldman Sachs and company.

Good morning.

Can you please provide additional color into the supply and demand dynamics in the flu market and more specifically, demand from physician, customers or has that decreased significantly or buying more of it direct?

And then more color on pricing environment -- we have seen some of your competitors are offering to accept returns.

Is that a risk?

Is there exposure ?Is Henry Schein planning to do something similar?

And then, finally, why a more conservative out look for flu in 2008?

You know, we saw a very strong sales to our physician customers and we did very little business to date with other than physicians.

You know, we do do a couple of governmental bids and we sell to some other third parties.

But the bulk of the sales to date is to the physician market; we are still seeing as of this week and last week, continued good sales growth.

We think it is overall a good season and hopefully that the CDC is going to be introducing, some of their public awareness campaigns which I think are coming out this week or next week, and continuing, And you know, we will keep demands strong.

With respect to returns -- our policy has been that we sell flu vaccine on a nonreturn basis to our customers.

We have not seen that as any significant factor in achieving our sales goals.

So, I don't see that changing at all for us.

You know, as far as, last part of the question was related to next year.

You know, we feel very good about you know, selling 12 million to 15 million doses, similar to this year.

Our primary supplier will be GlaxoSmithKline.

We feel good about that relationship.

I really just think it is a risk/reward situation -- for us to go buy product.

It is not to say we can't sell more.

But we want to feel very comfortable; in the 20 years of selling of flu vaccine, we have never had a situation of not being able to sell our committed volumes.

It is really just a risk/reward.

And you know, nothing more than that.

A follow up question on 2008 guidance.

The organic growth trends have been extremely strong this year.

How are you thinking about the trends moving into 2008.

Well, you know, I would say that you know, very generally speaking, we don't see major deviations from internal sales growth.

There are a couple of items that are baked into the guidance.

Number 1, when we look at dental equipment sales growth as most people realize dental equipment sales growth has benefited recently from new exclusivities that we have been doing well on.

Those exclusivities annualize after this quarter and we will see a little bit of impact related to that and that is baked into the guidance.

You know, we hope that we will see really our International sales growth.

If you look at the last four quarters.

It has been accelerating.

But I think right now, the level it is at is a comfortable level given the market conditions in Europe.

So we don't really see what the minor exceptions or any major deviations in internal sales growth.

Let me add one other thing.

Obviously we expect to have, on the equipment side, E4D sales in 2008.

And you know, that should benefit equipment sales growth in 2008.

That's all I had.

Thank you.

(OPERATOR INSTRUCTIONS)

Your next question is a follow up question from John Kreger with William Blair and Company.

Thanks very much.

Steve, since you were just mentioning E4D, can you talk a little bit more about your expectations.

I am guessing there is a long sales cycle for a new product like this.

I would say it is true, that it is a longer sales than other products.

But we also have a list of customers who have expressed interest in buying the product.

So the first thing we will be doing is going to that list and speaking speaking to those customers since they have expressed interest first, allowing them to buy first.

You know, we feel good about E4D coming out.

We feel like the product will perform well.

We feel like our relationships with our customers will allow them to sell it to the market.

But we also want to make sure that as we begin selling, that the customer training, support, and service levels are impeccable on the products.

So we want to make sure there is a positive customer buzz on the product and that's the only way you get into is by the training and support.

We want to make sure we don't go too quickly initially.

Great.

Separate question.

If you look at your International business now, what is the rough mix between dental, medical and vet?

It is moving more towards medical and vet with the Dunlop's acquisition.

Prior to Dunlop's it was 90% dental and the balance medical and vet, very highly weighted towards vet.

And now with Dunlop's's it is in the 70 something percent range on a go forward basis, and again Dunlop is all veterinary business.

Final question.

It is about economics and the slowing of and the impact of the dental business here in the US.

If I think back to the last time we saw this earlier in the decade, if I recall, consumable growth slowed a bit and your equipment business took off probably due to tax incentives.

As you think about signs of economic slowing now, would you expect a similar pattern or more stable trends?

Right now.

As you have seen in our results, our dental equipment steals have been very strong.

And we do believe there is a little bit of sensitivity in the market for very high priced products, high priced equipment that are you you know, newer products in the market.

We believe there is a little sensitivity there and again, right now looking at the third quarter results, we haven't seen anything related to economic conditions that would tell us the markets are slowing.

Stanley talked about implants a minute or two ago.

We had very strong sales growth and over 30% growth in implants in the third quarter; our prosthetic business had good growth.

So right now we are not seeing anything based on economic conditions.

It seal seems to be a greater demand, greater demand for dental services than actual, natural capacity.

And in order to bring it into balance, there is investment into equipment that leads to increased productivity in the office.

We see that in much of the western world.

Thank you very much.

Your next question comes from the line of David Veal with Morgan Stanley and Company.

One moment.

Your line is open.

Operator maybe we can go to the next line and come back.

David, your line is open.

I am here.

Can can you hear me.

Yes.

Maybe there are some cost synergies to be achieved from a new teleconferencing vendor.

So when we think about the stock price with some of the flu vaccine worries behind us, it feels like the stock price might be permanently above the conversion price when you convert.

Can you just talk to how you might think of refinancing that and what the out look looks like there?

Sure the convers -- is in the money it has a slight dilutive impact on our current earnings per share.

I believe that the first maturity comes in 2010 where there is a put or a call.

Right now, I think, my guess would be at that time, the convert would be refinanced, either because it is being put by shareholders or us calling it -- and it is probably because it is, you know, it would be our most expensive debt because it is effectively halving our equity with a coupon rate.

So it is probably the most expensive debt that is on the balance sheet today.

So my guess is that will be refinanced in the future.

That is basically in your guidance for '08.

That's correct.

It is in the guidance for '08.

Okay.

Sounds great.

Thank you.

(OPERATOR INSTRUCTIONS).

The next question comes from the line of Jeff Johnson with Robert Baird and Company.

Stanley, Steve, good morning, how are you?

How are you doing.

Good.

One question on flu.

Looks like pricing is obviously holding in fairly well if I do the math on just on your revenue and number of doses, it looks like over $10 per dose at this point and next year if I do the math on the guidance.

It may be flowing through to the bottom line, a little north of a penny mer million shares.

We have been thinking about a penny and a half per million doses.

And is there a change in contractual terms for next year as you reduce your allocation?

Is there slightly more pricing, more conservative pricing assumptions in your guidance for next year?

Or how we are wrong in how we run that through your P&L?

There is no change in our contracts.

The only things will be a mix difference, and we believe next year between manufacturers.

So, you know, it is a little bit over a penny per million doses, as you can see from the guidance.

And we are not really.

Maybe that is, now, maybe that, I think it is realistic.

No one knows what the pricing is going to be next year and we have built into the guidance, a conservative estimate on what we can achieve in profitability.

There's really nothing changed that's going on there, so I guess some of the estimates that were out there were a little bit off.

Fair enough.

Just to follow up on that.

The straight math we are doing the very simplistic math on the Q3 of revenue for flu versus number of doses over $10 is kinds of what you recognized at least in Q3 on a pricing standpoint.

Yes, that is correct.

But also be aware that our sales includes excise tax; excise tax is about $7.50 per vial so that is inclusive of excise tax.

Last question.

Just to make sure expectations are realistic going into Q4 and into 2008 and look at the dental equipment business.

Comps now over the last four quarters or at least growth in dental equipment organically is north of 20%.

I would assume it is still fair to expect double-digit dental equipment growth over the next few quarters and it won't fall off anything beyond that as you have E4D coming out as you talked about and the base business is very healthy there?

The base business is very healthy.

We have the annualization that happens in Q4 in the Biolase and and ISI products.

And we would still expect strong growth and we are not giving guidance by that level of detail.

We still expect to gain market share in the equipment segment and still expect to introduce E4D.

And even though those exclusives are annualizing, they should provide a good growth on year-over-year basis.

Fair enough.

Let me ask it a different way, Steve.

If we exclude the exclusives over the last few quarters, dental equipment, organic, around that double-digit range at least?

You know, again, for competitive reasons I would rather not give that level of detail if you don't mind.

I appreciate it, guys.

Thanks.

Your final question comes from the line of Robert Willoughby from the American bank company.

Did you comment on the move up in inventories for the receivables and payables.

Is that a flu phenomena or something else behind that?

Well, it as combination of the increased sales growth on the receivable side, yes.

It is directly impacted by flu vaccine sales because the bulk of what we sold in Q3 was in the September time frame and very little of that has been collected at quarter end.

The flu really does not have an impact on inventory because we turn it around very quickly so there was some inventory in hand and on hand at the ends of Q3 and it is not a big driver.

And if you look at the metrics for the quarter, we were more efficient on both receivables with improving DSOs by over half a day and inventory turns by over half a turn.

It is really just because of increased sales volume both on the organic growth and acquisition growth.

So the receivable is likely to come in this quarter and do you pay down the payables or how should we think about that?

You are talking specifically about influenza vaccine?

Yes.

I guess.

If that is the bulk of the receivables boost.

Yes, but that is normal.

Normal payment time for flu vaccines and normal payment to manufacturers and yes, we did offer some extended terms for some flu vaccine customers but that should be substantially collected by the year-end.

There may be some that trickles into the first quarter.

And again, I really would focus you more on you know, the not the absolute dollars but on the DSOs and inventory turns because that is a better metric.

Steve, just the accounts payable.

Line item fourth quarter.

That would trend higher.

Or lower?

No, it typically trends higher in Q4.

And you know, it is typically the potential for us to do some forward buy-ins at the end of the year.

So to the extent that that occurs that would not be paid for until January; I would expect it to trend a little bit higher.

Thank you.

At this time.

No further questions.

Do you have any closing remarks.

Okay.

Thank you, everyone, for participating in today's call.

As I assume you can tell from Steven and my words and our tone we are very, very optimistic about the overall prospects of the company and we thank you for your interest.

If there are any questions please feel free to give Steve a call at the Henry Schein number which is (631) 843-5915.

Neal Goldner our VP of investor relations his extension is 2820.

And Susan Vassallo, who heads up communications her extension is 5562.

So, we will be back again next quarter but I think it is in four months time, because of the extra months with the year-end.

Little bit later.

That's correct.

120 days.

Thank you very much.

Thank you for participating in today's conference.

You may disconnect at this time.