漢瑞祥 (HSIC) 2008 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Henry Schein second quarter conference call.

(OPERATOR INSTRUCTIONS)

I would now like to introduce your host for today's call, Neal Goldner, Henry Schein's Vice President of Investor Relations.

Please go ahead, Neal.

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

If you have not received a copy of our earnings news release, you can access it on our Web site at www.HenrySchein.com.

With me this morning are Stanley Bergman, Chairman 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 differ from those expressed in or indicated by such forward-looking statements.

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

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 5, 2008.

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

I ask that during the Q&A portion of today's call, you limit yourself to a single question and a follow-up before returning to the queue.

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

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

Stanley?

Thank you, Neal.

Good morning, everyone, and thank you for joining us.

We are delighted to report a 19% increase in net sales and a 20% increases in earnings from continuing operations for the second quarter of 2008.

These results reflect a strong contribution from our international group as well as solid growth here in the United States from our dental group.

We have said before that our customer's practices are relatively resistant to macroeconomic trends, though certainly not immune, and our first half results clearly support this thinking.

Our results also illustrate Henry Schein's ability to deliver consistently strong sales and earnings growth.

We remain confident about the future of Henry Schein and the confidence that we feel is determined straight demonstrated by the fact that, in the last quarter, we repurchased approximately $32 million of our common stock during the quarter.

In a moment, I'll provide some commentary on each of our four business groups, but first I'll ask our Chief Financial Officer, Steve Paladino, to provide an overview of our second quarter financial results.

Steve?

Okay, thank you, Stan.

Let me begin by saying that I'm also very pleased to report very strong financial performance for the second quarter.

Let me first point out that our prior year information was restated to report the oncology pharmaceutical and specialty pharmacy businesses as discontinued operations.

So for purposes of comparison, I will discuss our Q2 2008 results compared with our results from continuing operations in the prior quarter.

There is no impact from our discontinued operations in the current year's quarter.

Our net sales for the quarter ended June 28, 2008, were $1.6 billion, reflecting 18.6% growth over the second quarter of 2007, or 13.6% growth in local currencies.

4% of this growth was internally generated while 9.6% was acquisition growth primarily due to the acquisitions of Dunlops, a leading UK animal health product supplier; as well as Software of Excellence, a leading provider and supplier of practice management systems in the UK, Australia and New Zealand; and finally by our acquisition of Minerva, a full service dental distributor in the UK.

Please note that our details of sales growth are contained in Exhibit A which is attached to our earnings release issued earlier today.

We also previously announced an initiative of reducing sales of certain lower margin pharmaceutical products.

Excluding the sales of those products, our internal sales growth in local currencies was approximately 6.6% for the quarter.

Our operating margin for the second quarter of 2008 was 6.9% and was more than 30 basis points higher than the second quarter of 2007.

Our effective tax rate for the quarter was 34.1%.

That compares to 34.3% in the second quarter of 2007.

We expect our full year 2008 effective tax rate to remain in the 34% range.

Our second quarter net income was $65.5 million which represents 20.3% growth from the prior year's second quarter net income from continuing operations.

Earnings per diluted share for the second quarter was $0.71 and that reflects an increase of 18.3% over diluted EPS from continuing operations for the second quarter of 2007.

Now I'd like to provide you some detail on our sales results for the second quarter.

Dental sales for the second quarter of 2008 was $660 million, representing 9.7% growth in US dollars, or 8.7% growth in local currencies.

7.2% of this local currency growth was internally generated and approximately 1.5% was due to acquisitions.

Our consumable merchandise sales were 7.9% ahead of the prior year in local currencies with 6.3% internally generated.

And our dental equipment sales and service revenues were 11% ahead of the prior year in local currencies with 9.9% internally generated.

While E4D, our new product that we launched last quarter, positively impacted our second quarter dental equipment sales growth, to be consistent with past practices we are not providing unit or sales information for competitive reasons.

Our medical sales were $329 million in the second quarter, down 8.3%.

The components of that were internal sales decreased 8.9% and there was an acquisition which had 0.6% growth.

As we have said on our previous conference calls, we are providing sales growth excluding the sales of certain lower margin pharmaceutical products to give a better understanding of our underlying medical group sales trends.

Our medical group internal sales growth, excluding these products, was approximately 1%.

Remember, this [bill is on] approximately 8% internal growth achieved during last year's second quarter.

Turning to our international group, sales for the second quarter of 2008 were $615 million, up 55.7% over the prior year.

Our growth in local currencies was 39.7%, with 10.9% internally generated and 28.8% from acquisition growth, again due primarily to the acquisitions of Dunlops and Minerva.

Foreign exchange currency contributed about 16% to our international sales growth.

We are really particularly pleased with our double-digit internal sales growth recorded by our international group which excludes the benefit of any foreign currency effects.

Turning to our technology and value-added services sales, they were $41.1 million which were 29% ahead of Q2 '07; 28.6% was local currency growth and 0.4% was growth related to foreign exchange.

Of the 28.6% local currency growth, 1.8% was internally generated and the balance of 26.8% was due primarily to the acquisition of Software of Excellence.

We are really very pleased with the Software of Excellence acquisition as it had a strong quarter and exceeded our own internal expectations.

Our electronic and Financial Services businesses, which are a subcomponent of our technology and value-added service sales, also had a very strong quarter for the second quarter.

It's also important to note that last year our technology group reported internal sales growth of over 25% in the second quarter and that made for a difficult comparison this quarter.

Let's take a brief look at some of the highlights of our balance sheet and cash flow.

Operating cash flow for the quarter was $125 million compared with $115 million in last year's second quarter.

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

Our accounts receivable days sales outstanding from continuing operations was 39.8 days this quarter, and that compares to 40.6 days in the prior year's second quarter.

Our inventory turns from continuing operations were 6.6 turns and that compares to about the same number, 6.7 turns in last year's second quarter, but is an improvement over the first quarter where we were about 6.3 turns.

Finally, our return on committed capital from continuing operations was up to 36.9% and that compares to 34% last year.

Let me conclude my remarks by discussing guidance.

Today, we are reaffirming our full year 2008 financial guidance as follows.

We expect 2008 diluted EPS to be in the range of $2.93 to $3 per share, and that represents growth of 14% to 16% compared to the 2007 reported results.

This 2008 EPS guidance includes our expectation that we will distribute 12 to 15 million doses of influenza vaccine during the year, and that represents earnings of about $0.13 to $0.16 per diluted share.

And as always, our guidance is from current operations including any completed or previously announced acquisitions but does not include the impact of any potential or future acquisitions.

Let me now turn the call over to Stanley Bergman.

Thank you very much, Steve.

I'd like to provide you with some additional commentary on each of our four business groups.

On the dental side, we posted, as you can see from the press release, a solid sales growth during the quarter and continued to gain market share in both the consumable merchandise and equipment product categories.

Our dental customers continued to have busy practices and while certain aspects of the business are impacted by macroeconomic conditions, our sales mix reflects relatively modest exposure to those high-end and elective procedures.

This was evidenced in our 9% growth in consumer dental merchandise this quarter with over two-thirds of that coming from internal growth.

So we believe that both from an internal growth point of view and, of course, from a total growth point of view we continue to gain market share on the consumable side in the relatively healthy markets, and, of course, on the equipment side.

On the equipment side, we have quoted another quarter of double-digit growth and continue to be pleased with our relationship with our key equipment suppliers, including the Danaher group, Serona, and BIOLASE.

The quarter was highlighted by gains in high tech products including digital imaging and the progress we are making with the E4D launch.

The quarter marked our first full quarter of E4D, the CAD/CAM product.

I'm happy to report that we saw acceleration in sales of E4D compared with the first quarter and we expect further acceleration in the third and fourth quarter of 2008 and, of course, into 2009 when we will see our first full year of E4D sales.

As we've said previously, during this time our primary goal is to ensure that our early user experiences from the use of E4D are overwhelmingly positive.

We are delighted that feedback from dentists remains very, very encouraging.

During the second quarter, we began distributing ARESTIN in the United States under the exclusive agreement with OraPharma, a Johnson & Johnson company.

We are pleased with our early success of this product which provides unique benefits for treating periodontal disease and is one of the first major non-invasive diagnostic / pharmacological treatment products that we expect to see more of in the future.

And our ARESTIN OraPharma relationship fits the foundation for an important strategy for us.

We are also pleased with our exclusive agreements with Colgate, one of the world's largest oral care companies, and remain very excited about growing that part of our business.

Specifically, the area of preventative dentistry, and Colgate is really well-positioned to help us reach that goal.

We recently held our annual dental national sales meeting in Texas.

This event always provides a tremendous opportunity to hear directly from our salespeople about market conditions.

The feedback we received confirmed that the dental market continues to grow nicely, not totally immune from macroeconomic trends, but it remains quite resistant to such ups and downs.

It was an energizing meeting with more than 17,000 Team Schein members in attendance and morale across our sales force remains very, very high.

Our sales force understands our strategy of combining direct marketing with database marketing, telesales, highly robust Internet strategy and all of that driven by our field sales consultant strategy which is now, by the way, a global strategy on the dental, medical and companion animal side, and is doing very, very well for us.

The meeting also allowed our vendor partners the opportunity to introduce and showcase their products to our sales force and to strengthen our relationship with all of our major vendor partners.

In fact, one vendor partner, BIOLASE Technology, launched a new Waterlase C100 hard and soft tissue laser at the meeting.

The Waterlase C100 is positioned to appeal to a broader cross section of the dental market and we were very, very pleased with BIOLASE's management choice to launch this exciting new product at our national sales meeting, and again, it was well, well received.

We continue to be very closely aligned in strategy with BIOLASE and the two organizations' management teams are working closer together and that is cascading down into the field in a very nice way.

We expect continued strong dental equipment growth driven by further gains in advanced technology products, including the 3D imaging digital radiography, as well as an acceleration in E4D sales here in North America.

In addition, with less than 28% of our 2007 North American dental sales represented by dental equipment, we believe we are still somewhat under-penetrated in this important category relative to the overall dental equipment market which presents further upside to the company.

Finally, the favorable tax incentives should also drive equipment sales growth in the United States in the fourth quarter.

On the medical side, we are having good success in rolling out our privileges program to our medical customers.

This was our frequent purchase program that has been so successful on the dental side and in several international markets.

We ended 2007 with approximately 2,000 medical customers enrolled in privileges and at the end of the second quarter, that number increased to more than 5,000.

This program has been very well-received by our sales team and our customers.

Last quarter I discussed with you the Henry Schein Medical brand and the progress we have made under the Medical One World Initiative.

With a single brand in the marketplace, coupled with growth we have seen in the privilege enrollment program, we look forward to capitalizing on future sales growth opportunities within our Medical Group.

This optimism was reinforced during our annual medical national sales meeting which was held in June.

Also a very successful meeting where the morale of our medical sales organization remains quite high, in fact very high.

The meeting provided us with opportunities for team building, strengthening partnerships with vendors, and gaining insight into the marketplace.

The event also provided Dave McKinley, the Medical Group president, with an opportunity to interact with the full medical sales force all at once, more than 600 Team Schein members attended the meeting, along with more than 250 participants from our vendor partners.

All in all, a very successful meeting.

We are focused on profitability of our medical business, the concept of value-added services, and fielding an even more capable sales force than we already have and that sales force is already excellent in the consultative area.

And we are focused on increasing the training and effectiveness under that sales force so that we can increase the profitability of the medical business, which is already quite profitable but we feel that there remains a lot of opportunity for expanding the product offering and increasing the profitability of our medical business and therefore do not see a need or importance in putting capital to work in the lower margin pharmaceutical sector.

To conclude my comments on the Medical Group, I want to note that we remain optimistic about the upcoming influenza season based on current market conditions and our customer order activity as well as indications from manufacturers that we will receive product relatively early this year.

Now turning to the International Group.

As I mentioned at the start of the call, our international operations were particularly strong contributors to second quarter financial results with double-digit internal sales growth in local currencies.

Our internal growth remains very strong in Europe and in Australia and New Zealand.

Our International Group reported strong growth in all the major markets, highlighted by solid dental growth.

The United Kingdom had an excellent quarter driven by strength in dental business and acquisition of Minerva, a full service dental business that we acquired in April and expands our equipment footprint in the UK.

It is our goal to expand our equipment footprint throughout Europe as a follow-on to our successes in North America with respect to equipment sales and equipment market share growth.

We also saw strong growth in Germany, supported by marketing events in our showrooms and sales and high tech equipment and imaging products.

Our business in France had a very strong quarter as well, driven by the sales of laboratory equipment and growth in our mail order discount operation in France.

Henry Schein, the full service business, is also doing well in France.

Italy reported good growth in dental merchandise sales and we continue to expand our full service dental model so that we can provide national equipment sales and service coverage in the near future.

We are following a similar strategy to the strategy we followed in the United States and in France where we [full] out the map over a couple year period of time so that we became a full service provider of dental equipment throughout those countries.

We hope to be the first national platform for dental equipment in a full service model in Italy in the near future.

And our performance, as I mentioned Australia and New Zealand, was also excellent reflecting strong growth in both the merchandise and dental equipment sectors.

We also are pleased to report that the W&J Dunlop acquisition continues to perform above expectations.

Our pan-European veterinary companion animal distribution business continues to do well as a group and we see, over time, creating the first pan-European companion animal veterinary platform where we will be able to provide excellent services to our customers -- unique services may I add -- and to the vendor community.

We continue to look forward to the improvement in operating margins in our International Group as we drive more products through our infrastructure, continue to roll-out our standardized SFE technology platform in Continental Europe.

The integration of SIP in the very important market in Italy is now behind us.

We are also are working to improve margins in Dunlops to be in line with our overall distribution margin for Henry Schein in Europe.

Let me now conclude with some remarks on the technology and value-added services business which reported sales growth of 29%.

Revenue growth reflects last year's acquisition of Software of Excellence with a strong footprint in the UK, Ireland, Australia and New Zealand.

They are a leading supplier of innovative clinical and practice management solutions to dentists.

They performed above expectations and continues to help us drive our sales of digital and other high tech products within the UK market in particular.

We also saw strong growth in the electronic and financial services sector in the technology parts of our business in the United States.

This business has great opportunities for electronic services where our suite of products continues to lead the marketplace.

During the quarter we launched Easy Dental 2008.

This updated version offers dentists increasing functionality and improved productivity, living up to its tag line of easy to use, easy to own.

Keeping the dental practice management software concept for a moment alive here, let's talk a bit more about that.

We are proud that early this year DENTRIX was named system of choice by the American Association of Dental Office Managers.

As you know, DENTRIX is the leading practice management software for dental professionals.

Endorsement of the DENTRIX system validates our commitment to providing leading software solutions and developing products that meet the needs of the ever-evolving dental office.

And, in July, we announced the MicroMD EMR electronic medical record version six.

This updated version is designed to enhance the physician experience by improving existing workloads and streamlining access to patient information.

A new release enables practices to connect to 95% of the pharmacies nationwide, allowing physicians to send prescriptions to pharmacies electronically and receive electronic refill requests from the pharmacies.

As a result, of course, patient safety improves and providers save time.

In conclusion, I'm very pleased that Karyn Mashima was elected to the Henry Schein Board of Directors at our annual meeting of stockholders in May.

Ms.

Mashima is a wonderful addition to our board.

She currently serves as senior Vice President of Strategy and Technology for Avaya, a leading global provider in business communication applications and systems services.

She has more than 25 years of professional experience in guiding technology products and has earned a well-deserved reputation as a visionary in the technology field.

Her appointment reinforces Henry Schein's commitment to remain a technology leader and to appoint visionary and highly reputable individuals to our board of directors.

Lastly, we are quite gratified that Henry Schein was ranked 53 in the 2008 Baron's 500, up 140 positions from last year.

This ranking is for the United States and Canadian companies, and is based on stock price performance, cash flow return on investments sales growth.

The increased ranking is a testament to the hard work and commitment of the more than 12,000 Team Schein members who operate out of 300 plus locations around the world.

So, with that overview behind us, I thank you for your attention, and Steven and I would be very, very happy to respond to any questions that you may have.

(OPERATOR INSTRUCTIONS) Our first question comes from Glen Santangelo.

Yes, Stan, just a quick question following up on something you said earlier.

In your prepared remarks on dental, you sort of suggested that the Company continues to gain market share on both the equipment side as well as the consumable side.

Can you maybe give us a little bit more detail around that, and do you think the market share is coming from business that's traditionally gone direct, or you think you are taking some of that from your distribution competitors?

And then maybe if you can give us a couple of more specific areas as to where you think you're taking the market share on the equipment side, that would be helpful.

Glen, we think the markets have been growing at about 5% or so over the last several years.

They may have slowed down just a tad, may have been made up by a little bit of inflation.

It's hard to gauge the specific growth number that precisely to the nearest basis point.

Having said that, we are growing at more than 5% internally from a merchandise point of view and about double that from an equipment point of view.

We think the merchandise business growth is coming from, across the board, from our competitors.

We don't think that it's been impacted in any material way by direct products that are now going through the channel.

ARESTIN itself is an agency relationship, so we only book our commissions so that doesn't impact the sales much although it's quite profitable.

I mentioned earlier on, the launch has been quite successful.

So on the merchandise side, we believe it's coming from across the board.

On the equipment side, well, it's coming from a lot of the high tech products.

The digital side, we are doing very well with the DEXIS system plus a couple of others.

We were at somewhat of a disadvantage in the marketplace for awhile.

We didn't have a good brand, but now the DEXIS brand, of course, is highly recognized.

The product has been improved and I think we are gaining market share on the digital side in, I might add, a rapidly growing market.

On the CAD/CAM side we were excluded from that sector and now we are in that although the sales were not that material, they count, and we are in that sector.

On the ISI side, on the 3D side, that was a direct business, so the year and change ago, and now that is going through the channel.

ISI is not the only player today.

There are others in that sector and we carry some of those other products and I believe that's helping our growth and no question that we had the largest percentage of the 3D marketplace.

BIOLASE, yes, that was a product sold direct and is now going through our channel.

But the traditional business also is solid and we, I think, continue to gain recognition as a provider of traditional equipment -- in other words, the chairs, units, lights, cabinetry, X rays, compressors, and I think we continue to gain market share there.

So, I think it's a matter of gaining competition -- sales across the board on the equipment side as we become more recognized as a full service dealer.

I still think there's a lot more opportunity because many dentists don't associate Henry Schein with equipment sales.

So it's across the board and it's taking some products from the direct channel through distribution.

Thanks for the comment, Stan, and congratulations on the quarter.

Thank you.

Your next question comes from the line of Randall Stanicky.

Great -- I'm with Goldman Sachs.

Thanks for taking the question.

Just first, on the minority interest line, it continues to bounce around a little bit and was up again sequentially.

Is that just a pick-up in implants and how do we think about that line item going forward?

The minority interest line was driven by strong growth in our Camlog implant business as well as strong growth in our Australian / New Zealand business.

Both of those businesses Henry Schein owns a controlling interest but there is a minority interest and we should continue to see additional growth in the minority interest line as the overall business groups continue to grow nicely in the future.

So we should expect to see that $7 million continue to grow?

Is that the new run rate we should think about there?

I would say yes.

I would say that we are continuing to see growth in those businesses so, yes, we will see that line grow.

Remember the way the accounting works for that, that's just backing out the minority share earnings, obviously that's a good thing as that number grows, that means above that line there's higher growth in overall income.

Okay, great.

Just finally, you talked about earlier shipments included -- how do we think about the back half split between three and four Q as you're thinking about it, at least, at this point in time?

It's really, really difficult to predict what will happen in Q3 versus Q4 with the influenza vaccine.

But I can tell you at least manufacturers are indicating to us that they are optimistic that they'll have product early in the season.

So I'll pass that comment on to you.

But again, what we'll do when we announce Q3 and Q4 earnings, if the timing is where it is early in the season, it's more weighted towards Q3, we'll get a detail on that or, if the opposite happens, we'll also give detail on that.

So we'll be very transparent on the timing of flu vaccine.

But again, the indications from the manufacturers are that it could be a little bit earlier this year.

Which I think is a good thing for the industry as well as ourselves.

That's great.

I'll stop there.

Thanks for the questions.

Your next question comes from John Kreger.

All right, thanks very much.

I'm just hoping you can expand a bit more on your comments around the national sales meetings that you held recently.

On the dental side, what are your salesmen telling you about how the second half might play out around the traditional heavy season for equipment buying in dental?

Is it likely to be a pretty typical season or could it be better because of the tax incentives or perhaps worse because of the tough environment?

And then the follow up on the medical side, also curious, what did you hear at the national sales meeting that is causing the optimism in the face what have looks like some slower growth coming out of the segment?

Thanks.

On the dental side, dentists continue to be -- and this is the sense we get from our salespeople and from the market in general -- continue to be quite busy.

The backlog may not be as many weeks of appointments as perhaps it was a year or two ago but they are occupied and they are quite busy.

They had a lot of choices in terms of high tech equipment now -- expensive equipment -- at least from us, they have the E4D, the ISI, the Galileos equipment, they have the lasers and, of course, general traditional equipment with a lot of new equipment being exposed to the marketplace these days.

So there are lots of places to spend their money.

Our sales organization tells us that they will spend money.

They may not buy everything from that mix but they will spend money.

The tax incentives are likely to create some fueling of this interest in acquiring high tech equipment, perhaps even refurbishing the office.

If one leases equipment or actually takes out a loan for equipment, it becomes immediately cash flow positive from a tax point of view.

So we expect that we will have a good year in the fourth quarter.

We did have a very good year in the fourth quarter last year and the year before.

So we are relatively comfortable that we are going to see consistent growth.

There are a lot of exciting activities going on at Schein including ARESTIN, Colgate and a number of other areas that -- the technology area, the update of DENTRIX.

All of these are making for a very exciting environment within our Dental Equipment Group.

On the medical side, the excitement remains related to the consolidation of our business under one brand.

It was, of course, a huge undertaking with tens of thousands of accounts being reassigned within our fellow Sales Group and also within our Full Service Group.

The programs that are available to our field sales representatives as a result of the synergy between telesales and field sales is something that's exciting that group.

There is some commodity deflation as pricing becomes more competitive with certain products, but there is also inflation on certain commodity products that have a raw material base such as gloves.

So one should be very careful when reviewing the actual results as there's a lot of puts and takes there and not necessarily related to units.

There is also some shortage in a couple of product areas on the pharmaceutical side and there is a shift in our mix of pharmaceutical products.

But overall ,our salespeople and management continue to be very, very enthusiastic about our medical business which, over the long run, presents perhaps one of the biggest opportunities that Schein has.

Great.

Thanks very much.

Your next question comes from Robert Willoughby.

Hi, this is Erin Gore in for Robert today.

I just had a question for you on the physician revenue growth.

When can we expect the negative comps to come back?

To reverse themselves?

Well, hi, Erin.

If you're referring to because of us not selling the low margin pharma sales -- I assume that's your reference --that will continue for the balance of this year because we effectively stopped selling those low margin pharma-products towards the end of 2007.

So we will continue for the balance of this year and then we will have to continue discussing that starting in first quarter of '09.

Okay.

And a different note, can you just comment on your appetite for acquisitions?

Has that changed and what do you have coming down the pipe?

Our appetite for acquisitions has remained consistent for the 52 quarters that we've been a public company.

Our pipeline remains as full as it ever has been.

And we expect to continue to make acquisitions that are of the tuck-in type or they expand our current business geographically or expand our value-added services in one way or another.

But we expect to fully remain within the $25 billion office space practitioner market where we have about a 22% market share and we expect to have acquisitions continue to be accretive in that overall marketplace.

Okay, and last question, I'm not sure if this is discussed but with the solid quarter here, why did you reaffirm the guidance?

Why was there not an uptick in the guidance projection for the latter half of the year?

Well, I think we actually feel good with the first half results?

We feel bullish about the second half opportunities.

We felt reaffirming guidance, given what's going on in the overall economy, was a positive statement.

So, you know, overall, we still feel very good about our business, the results of Q2 as well as the projected results going forward.

And we just felt the right thing to do was to reaffirm guidance at this time.

Okay.

That is it.

Thanks.

Thank you.

Your next question comes from the line of Lisa Gill.

Hi, good morning, Stanley and Steve.

Steve, just a follow-up on that last question.

As we think about things, and clearly you put up a much better second quarter than what you had anticipated, at least the last time we talked on last quarter's call.

Was there anything that got pulled forward from maybe the third or fourth quarter into the second quarter and that's why you are somewhat comfortable with where things will still be in the second half of the year or is it just conservatism?

And then, secondly, you showed some really nice improvement on your SG&A this quarter.

Can you talk about anything that was specifically driving that?

And just the last question, is just the timeline of when you expect to complete your share repurchase?

Thanks very much.

Sure.

I would say there's really nothing noteworthy that we felt that we pulled forward from future quarters into Q2.

I think, on the contrary, as we tried to outline, we really had very good results from our International Group, double-digit internal sales growth, really up and down across the board.

There's a recent industry piece on the ADDE which came out which indicated that European dental sales growth has increased modestly.

So I think it's a combination of the markets being good and us really taking market share.

So again, we feel real good about the business prospects going forward.

There's a lot of opportunities for us.

We feel good about the second half.

So, not to put words in your mouth, you are definitely feeling good about the second half and you're just being conservative at this point given everything else that's out there?

I think we do feel good about the second half.

I don't want to characterize.

The guidance is the guidance.

We felt the right thing to do given everything going on in the economy which is to reaffirm.

We feel good about reaffirming.

At the high-end of our range, it will be a mid-teens EPS growth for the second half of the year.

And that's all internally generated so hopefully there will be some opportunities as Stanley just discussed on the M&A side.

So again, we feel good about the business opportunities going forward short- as well as long-term.

And then, just any thoughts on SG&A in the quarter, the nice sequential improvement as well as the share repurchase timeline?

It's really a combination of our continued efforts, both domestically and internationally in expense management, so that was good, plus very strong top line growth.

Overall growth was 19% in the quarter.

Now, some of that's acquisition growth, some of that's internal growth, but all of that growth helps leverage the infrastructure.

So that was a very positive thing.

I would point out -- we didn't specifically talk about it -- but if you exclude out Dunlops which, as people know, has a lower operating margin, our operating margin would have been expanded by an additional 20 basis points this quarter.

But we really got very good leverage on our expense structure and we hope that will continue.

And lastly on the stock buyback -- your final question -- we felt that the pricing, we were under pressure a little bit with the stock pricing in the second quarter, so that's why we did buy back $32 million.

We don't have a specific time period for buying back all of our stock, but I do believe given the recent stock price levels, that we will continue to be active in stock buyback.

We tend to be opportunistic and buy on weakness and that's why we were buying as much as $32 million in the second quarter.

So I fully expect to continue to be active but we don't have a specific timeline for the remaining stock plan.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Larry March.

Thanks Stanley and Steve, good morning, good results.

Really want to do just clarify the internal growth numbers in dental consumables.

Steve, I think had you said last quarter that you might have been somewhat negatively impacted because of the timing of holiday that would you see some pick up in the second quarter.

If you sort of net those two out, would you feel like you saw pretty consistent growth trends Q2 to Q1?

Or do you think you saw some acceleration?

Well, it's hard to precisely calculate that but I do think that we have seen a little bit of acceleration in dental consumables in Q2.

And the reason why I say that is, if you take a look at the average internal sales growth for the first half which should eliminate any impact of the Easter timing between Q1 and Q2, we did deliver better than that growth in dental merchandise and as well as other categories.

So my belief is that we did have a little bit of acceleration in consumable merchandise.

And is the ARESTIN -- I know it's a diminuous contribution to revenues, but was it a diminuous contribution to internal growth in the quarter?

Right now because it's an agency sale, Larry, it's really not a big impact on the top line although we are still very excited about the product and we just launched it so we need a little bit of time to make inroads with that.

So we are very excited about the opportunity with it and it does deliver nice profitability.

But on the top line it really was not a driver this quarter.

Is it just -- your biggest supplier talked about it just as internal growth US about 3% and they are saying the dealers might see faster growth than that.

Is it really -- we should look at you as having a broader product line so you are actually selling in some bigger growth categories than just that one supplier?

Or is it a little bit more complicated than that?

You know, it's, again, hard to answer.

We certainly have versus any supplier, we certainly have a broader product offering.

We tend to be strong in areas that are not economically impacted.

So actually the opposite is true.

Things like US dental implants, very small sales contribution.

Some of the high-end elective procedures, and on orthodontic, we really have very low sales contributions so we happen to be well-positioned with our sales mix, and I think that's part of the reason why we are doing well on consumables as well as equipment versus some of the manufacturers that are broader in those spaces.

Great.

Just a follow-up, then.

On the international business, great result here, big contributor to internal growth, over 10%.

Now I haven't seen the ADDE study, but is that suggesting there is seeing some internal growth acceleration in Europe or not?

And do we think of this 10% as just an unusually strong result or do we think more normalized, you think that market is growing overall?

I know it's hard to categorize because that includes vet, dental and I think some medical, but do we think of that still as sort of a mid single-digit internal growth for you or is that 10% a signal of additional good things to come?

I think there's a couple of points.

The ADDE study did show a modest uptick in sales growth.

It's probably still in the 5%, 6% range that it showed.

So we are certainly gaining market share in international.

Again, Larry, remember the Easter impact.

So we did get a little bit of benefit also of the Easter impact in Q2.

But I have to tell you we feel very optimistic about the international business going forward both on the top line and especially on the bottom line as we expand margins also.

Right.

Just a clarification, the equity affiliates -- I know the last quarter you had said good growth in your investment you have in the discount dental business.

Sequentially, I know it was down some, but still up obviously a lot year over year.

Why might there have been some seasonality there?

You know, there's not a specific reason.

I think it's kind of the ebbs and flows of that business.

But the increase over prior year was primarily, that affiliate did an acquisition of another company.

So the run rate that you're seeing for the first half of the year should be a continued run rate and growth on top of that as that business is growing also.

But there's nothing really to point to on a consecutive quarter basis that would say -- other than, again, ebbs and flows and timing of the quarters.

Very good, thanks.

We have time for one last question.

And we do have a question from Jeff Johnson.

Good morning, Stanley.

Good morning, Steven.

Good morning.

A couple questions here.

Steve, as far as Q3 versus Q4 EPS, I know you don't provide quarterly EPS, but sometimes you'll provide a little color on the forward quarter.

You come up against a tough comp, I think 40% plus EPS growth in Q3 last year.

Should we be thinking about a little higher Q4, a little lower Q3 as far as EPS growth next quarter?

Now -- and I don't want to not directly try to answer the question -- but really one of the earlier questions regarding timing of flu vaccine is so critical to Q3 versus Q4.

So at least what we are hearing from manufacturers is they expect flu vaccine doses to be in the market earlier this year than prior years.

Time will tell how true that is.

I certainly believe that's a good thing for us as well as the overall market because we certainly believe the earlier product gets into the market, the bigger the overall demand will be because as it gets late in the season, obviously there are some people who will not be vaccinated, some providers who elect not to buy product late in the season because they have less usage for it.

Again, the only thing we can do is be perfectly transparent when we release Q3 earnings and by that time, we will know what we sold in Q3, we will know what we sold in the beginning part of the fourth quarter for flu vaccine and we'll be able to really give good color and guidance on that.

But to really try to ,predict Q3 versus Q4 with the flu timing is really difficult to do.

Fair enough.

Steve, and then on flu vaccine, can you at all qualitatively comment on pricing and or presold volumes as we go into the third quarter here?

I think right now pricing, we would rather not comment specifically other than say that pricing is holding up pretty well at this time.

We feel very good about our position and as Stanley mentioned in his remarks, that a combination of -- we are seeing in the market and customer order activity where we do have certain contracts with customers as well as a very good prebook order process.

So we feel good about going into the season.

But remember, we haven't received our first dose of flu yet.

We haven't sold our first dose yet.

But the indicators are very positive right now.

Great.

Last question, again, getting back to Q3, Q4 timing.

In the dental equipment business, though, summer tends to be seasonably slow, at least here in the US and Europe, and you're going up against your toughest comp, tax incentives in Q4 might drive a little more there.

Again, should we think about the back half of the year more Q4 weighted than Q3 on the dental equipment side?

I would say yes primarily because of the tax incentives.

I think people, customers, in Q4 will pull the trigger, so to speak, to take advantage of those tax incentives.

So I guess I would expect Q4 to be helped by that on the equipment side.

That's a US concept.

I'm not sure that you can make the same analogy in Europe because Europe doesn't have the favorable tax incentives.

But it's always seasonally better in Q4 obviously.

Understood.

Thanks for the comments, guys.

So thank you everyone for participating in the call.

As I think you can tell from Steven and my tone we remain optimistic about the Company.

We are very happy with where we are.

These are obviously challenging times from a macroeconomic point of view.

The Company overall -- the portfolio on balance -- is relatively resistant to the swings of the economy but not totally immune.

But we think from an earnings capacity point of view, we continue to be in a very good position.

We continue to gain market share across the board.

We are optimistic about some acquisitions in the quarters ahead of us and it will make a difference both strategically and from an economic point of view to the bottom line.

And we thank you all for participating in this call and showing interest.

If you have any questions, Steven can be reached at (631)843-5500, or Neal at (631)845-2820.

So we look forward to updating you in another 90 days or so on the third quarter.

Thank you very much.

This concludes today's conference call.