漢瑞祥 (HSIC) 2008 Q3 法說會逐字稿

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

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

Later, we will conduct a 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, Neal Goldner, Henry Schein's Vice President of Investor Relations.

Please go ahead, Neal.

Thank you, Brent, 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 our earnings news release, you can access it on our website 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 Commission filings.

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

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 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.

Thank you, Neal, and good morning, everyone, and thank you for joining us for our third quarter 2008 telephone conference call.

We are pleased with our sales growth during the third quarter of almost 10%, which reflects the benefits of our globally diversified operations.

Earnings growth was also strong, up 18% excluding the one-time charge related to the Lehman Brothers bankruptcy we announced this morning, and was highlighted by operating margin expansion that was in line with our long-term financial objectives.

As we have said in the past, while our customers' practices are largely resistant to macroeconomic conditions, they are certainly not immune.

Given the recent changes in the economic climate, we expect that the markets we serve will continue to grow, but at somewhat slower rates during these challenging economic times.

And while we remain confident in our ability to achieve our long-term financial goals, we are taking action, in light of our current view that sales growth for 2009 may moderate somewhat from what we have experienced over the past several years.

Specifically this morning, we announced an expense reduction initiative that includes reducing our work force by approximately 300 positions and closing several smaller facilities.

This reduction in work flow -- in the work force represents approximately 2.5% of our total head count.

This is a very difficult decision for Henry Schein, but by taking these steps to reduce costs, the company will remain well positioned to help our customers operate more successful practices and deliver high-quality care to their patients in this challenging period.

We have confidence in the future of Henry Schein and demonstrated this confidence by repurchasing about $23 million of Henry Schein common stock during the quarter, plus an additional $28 million already this 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, Steven Paladino, to provide an overview of our third quarter financial results.

Steven?

Okay, thank you, Stan.

Let me start by pointing out that the prior year information has been restated to report the oncology pharmaceutical and specialty pharmacy businesses as discontinued operations.

For purposes of comparison, I will discuss our Q3 2008 results compared with the results from continuing operations in the prior year.

There is no impact from discontinued operations in our current period.

Our net sales for the quarter ended September 27, 2008 were $1.65 billion, reflecting 9.6% growth over the third quarter of 2007 or 8% growth in local currencies.

2.2% of this growth was internally generated, while 5.8% acquisition growth was primarily due to the acquisitions of Dunlops, Software of Excellence, and Minerva.

Please note that the details of sales growth are contained in Exhibit A of our earnings news release that was issued earlier today.

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

Excluding sales of those products, worldwide internal sales growth in local currencies was approximately 4.5%.

Our operating margin for the third quarter of 2008 was 7% and was 56 basis points higher than the third quarter of 2007.

I think it is important to out that excluding flu vaccine sales, our operating margin also expanded.

It expanded by 41 basis points during the quarter, as we continued to grow our sales and leverage our infrastructure.

Our effective tax rate for the quarter was 32.5%, and that compares with 34.1% in the third quarter of 2007.

We expect our effective tax rate to remain in this 32% to 33% range for the fourth quarter of 2008.

And for 2009, we expect our effective tax rate to be in the range of 33 to 34%.

Our third quarter net income was $68.4 million, which represents growth of 12.8% from the prior year's third quarter, and that prior year third quarter again is from continuing operations.

Earnings per diluted share for the third quarter of 2008 was $0.75 per share, reflecting an increase of 13.6% over diluted EPS from continuing operations for the third quarter of 2007.

As noted in our press release, these results include a pretax charge of approximately $4.5 million, or $0.03 per diluted share, related to the Lehman Brothers bankruptcy.

There are two components of the charge.

First, we entered into foreign exchange forward contracts with Lehman Brothers to hedge our intracompany transaction flows with our international operations.

These contracts hedged identifiable transaction flows and were not speculative hedges.

With the bankruptcy of Lehman Brothers, these contracts are in default and as such, we have reserves -- reserved amounts due us totaling $3.7 million.

Second, we had cash invested in the reserve primary fund.

That's a money market fund that owned Lehman Brothers' debt that is now being liquidated.

We have reserved approximately $0.8 million against a potential loss from this investment.

Excluding the impact of this charge, our net income from continuing operations was $71.5 million or $0.78 cents per diluted share, an increase of 17.8% and 18.2% respectively compared with last year.

Now let me provide some detail on our sales results for the third quarter.

Our dental sales for the third quarter of 2008 was $644.9 million, representing 4.5% growth in US dollars or 4.4% growth in local currency.

Substantially all of this growth was internally generated.

Consumable merchandise sales were 4.8% ahead of the prior year in local currencies, all of which was internally generated, and dental equipment sales were 3.4% ahead of the prior year in local currencies, again substantially all of which was internally generated.

Our medical sales were $426.9 million in the third quarter, which is down 4.1%.

Our internal sales decreased 4.2% and there was small 0.1% growth from acquisitions.

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

Our medical group internal net sales growth excluding these products was approximately 3.4%.

During the quarter we sold approximately10.5 million doses of flu vaccine for the third quarter, representing sales of approximately $86.4 million.

This compares with 7.3 million doses in last year's third quarter, which represented approximately $78 million in net sales.

Excluding sales from influenza vaccine and lower margin pharmaceutical products, our internal medical sales growth was plus approximately 2%.

Turning to our international group, sales for the third quarter of 2008 were $538 million, up 30.7% over the prior year.

Growth in local currencies was 24.7%, with 5.2% internally generated and 19.5% acquisition growth, due primarily to the acquisitions of Dunlops and Minerva.

Foreign exchange currency differences contributed 6% to our international growth.

Our technology and value-added services sales were $41 million and were 28.8% ahead of Q3 '07.

11.3% was internally generated, and 17.5% was from the acquisition of Software of Excellence.

Our electronic and financial services businesses had very strong growth during the quarter as well.

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

Operating cash flow for the quarter was $49.9 million, and that compares to $69.2 million in the prior year third quarter.

On a year-to-date basis, our operating cash flow was $188.6 million, and that compares to $149.9 million in last year's year-to-date results.

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

Accounts receivable day sales outstanding from continuing operations was 41.4 days for the third quarter, and that compares to 42 days for the third quarter of 2007.

Our inventory turns from continuing operations for the third quarter was 6.6 turns, basically unchanged from the second quarter, and this compares with 6.9 turns for the third quarter of 2007.

Our return on committed capital from continuing operations was 37.5% for the third quarter of 2008, and that improved from 34.7% in the third quarter of 2007.

Let me also note that in early September, we announced that we replaced our previous $300 million credit facility with a new $400 million credit facility at favorable turns.

This new facility, which is currently untapped, is a five-year facility - committed five-year facility that matures in September 2013.

We are very pleased to secure this facility, given today's very challenging credit environment, and are also very pleased to have a strong banking syndicate led by JPMorgan Chase.

As Stanley mentioned this morning, we announced the initiatives to reduce costs in light of the current economic environment.

We expect one-time pretax costs associated with this initiative to be in the $22 million to $25 million range, and we expect these costs to be recorded in the fourth quarter of 2008.

We further expect annual pretax savings from this initiative to be approximately $24 million to $27 million, and this is included in our 2009 guidance.

Let me conclude my remarks by discussing our guidance.

We are updating our 2008 financial guidance as follows.

We expect 2008 diluted EPS to be $2.94 to $2.96, and that represents growth of 14% to 15% compared with 2007.

This guidance excludes the charge related to the Lehman Brothers bankruptcy as well as the costs associated with the expense reduction initiative, and this compares with our previous guidance for 2008 in the range of $2.93 to $3 per share.

Our 2008 EPS guidance includes our expectation that we will distribute approximately 4.5 million additional doses of flu vaccine during the fourth quarter.

This 2008 guidance is for current operations and includes completed or previously-announced acquisitions, but does not include the impact of any potential future acquisitions.

Turning to next year, we are introducing 2009 financial guidance as follows.

We expect the 2009 diluted EPS to be $3.27 to $3.36, representing growth of 11% to 14% compared with the midpoint of our 2008 guidance.

The 2008 guidance excludes, again, the charge related to the Lehman Brothers bankruptcy, as well as the costs associated with the expense reduction initiative.

Let me point out that our 2009 guidance takes into account the recent strength in the US dollar, as well as current economic conditions.

And also our 2009 guidance includes our expectation that we will distribute between 12 million and 13 million doses of influenza vaccine during the year.

This 2009 guidance, as all of our guidance is, is for current operations and does not include the impact of any potential future acquisitions.

Let me now turn the call over to Stanley.

Thank you, Steven.

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

Let me start with the dental group.

Based on anecdotal information, we believe that the backlog of patients at the average dental office has gone down somewhat, although not a lot.

But as evidenced by our consumable merchandise sales growth this quarter, dentists continue to have busy -- continue to have busy practices.

While we do not think the current economic environment had a significant impact on our dental consumable merchandise sales, we do believe it had an impact on our sales of dental equipment, where growth was slower compared to the previous quarters.

We expect dental equipment growth in the fourth quarter to be similar to the third quarter growth, yet over the long-term we expect dental equipment growth to be driven by further gains in advanced technology products, including 3D imaging, digital radiography, and CAD cam.

In addition, with less than 28% of our 2007 North American dental sales represented by dental equipment, we continue to be underpenetrated relative to the overall dental equipment market.

We have solid relationships with our key suppliers, such as Colgate, for consumable dental merchandise, Johnson & Johnson for products such as Arestin, Danaher, Midmark, [A Techniques], D4D, Serona and Biolase for dental equipment, among others.

These relationships provide Henry Schein with an important competitive advantage.

Another competitive advantage that we enjoy is the ability to facilitate financing for our customers in these uncertain economic times.

Through Henry Schein Financial Services, we are able to offer our customers equipment financing at attractive rates, at a time when others have very limited access to capital.

Let me remind you that we provide our customers with access to financing and get paid immediately, with no recourse to Henry Schein.

Our third quarter results for Henry Schein Financial Services were really terrific, and we are pleased with the fact that we can continue to finance a greater portion of our dental sales, specifically on the equipment side, through Henry Schein Financial Services, and that the facilities remain readily available through our customers.

Let me now turn to our medical groups.

As Steven mentioned, during the third quarter we sold 10.5 million doses of influenza vaccine and as of October 31, we sold approximately 12.7 million doses.

We were pleased that our manufacturing partners received early FDA approval this year, which we were able to leverage to better serve the needs of our customers.

During these difficult economic times, our customers are looking to us to help them maintain or expand their profits.

One solution that our medical group offers is a selection of more than 5,000 Henry Schein private brand items.

These include disposable supplies, instruments and testing kits, which we sell at considerable savings versus the branded alternatives.

One should recognize that as one moves sales from the brand to the private brand, the corresponding sales go down.

However, the savings for our customers go up, and the absolute dollars in profits go up for the company.

And more than ever, customers are choosing today these high-quality products, as evidenced by the 20% growth in our private brand sales by our medical group in the third quarter.

Parenthetically, similar growth has been experienced in our dental group and our international group, where the conversion from branded product to private brand does deflate the selling price.

That is of great interest to the customers and of course maintains, or actually increases, our overall gross profit in absolute terms.

We also continue to make progress with our Medical One World initiative, and are excited about the opportunities created from the consolidation of our businesses under the Henry Schein medical brand.

Now let's turn to the international group, where the results reflected solid internal sales growth in local currencies, as well as the impact of certain successful strategic acquisitions.

I'm happy to report to shareholders today that we once again achieved solid growth in all of our major international markets.

The UK had a good quarter, driven by strong dental consumable and equipment sales, as well as the results from the Minerva acquisition, a full service dental business that we acquired in April.

Minerva is now fully integrated into our UK business, and we are seeing synergies from the sales of consumables to Minerva customers and additional equipment to the Henry Schein customers.

Our business in France reported strong quarter -- a strong quarter, driven by sales in both merchandise and equipment.

We reported good sales growth in Germany, driven by strong equipment sales.

We had a very strong quarter in Australia and New Zealand from a sales point of view, and of course from a profit of view as well.

We recently signed an exclusive agreement with Danaher to be the exclusive distributor of their [Cabo] line in Australia to supplement our already good offering of equipment in that country.

Finally, we recorded good sales in Italy, driven by particularly strong equipment growth.

We also are very pleased with the SAP software platform that is now fully implemented in our Italian businesses, which will help us operate more efficiently on a pan-European basis.

The strategy for our overall European business is to move all of our businesses onto a common platform.

I returned from our Italian business last night, and had extremely good meetings with our Italian team yesterday, which yet again proves that the concept of migrating to a common platform for Henry Schein businesses throughout the world is the correct way to go, and in the end will be very, very good for top line growth, as well as reducing our expenses and therefore increasing our operating margins.

Finally, let me conclude by a review of our business groups, with a discussion of the technology and value-added services group.

This group extended its long history of excellent sales growth, with quarter sales up 29% over the prior period.

Revenue growth reflects the acquisition last year of Software of Excellence, a leading supplier of innovative clinical practice management solutions, and related equipment.

Software of Excellence, with its excellent management team, continues to perform very well and above our expectations.

We are gratified to see that the strategy to incorporate dental imaging sales into the Software of Excellence business is working very well.

We also saw continued good growth in financial services, as I mentioned earlier on, as the number of equipment and practice financing transactions increased by more than 30% in the third quarter compared with the previous year, and we remain ready with the appropriate credit lines to support fourth quarter equipment sales, and of course into 2009.

So in closing, we did achieve solid third quarter financial results.

We also are pleased to be on track to meet the full year guidance for 2008 that we introduced over a year ago, despite deterioration in the overall economic environment.

We think that this is a testament to the management team and to all 12,000 team Schein members, that over a year ago we developed the appropriate plans to generate the earnings guidance and the related results.

We of course fine tuned those plans during the year, and are confident that the guidance that Steven provided is within our comfort zone.

Furthermore, as testament to our confidence in the strength of our business model, we have introduced 2009 guidance that features EPS growth of 11% to 14%, again in the face of challenging macroeconomic trends.

With nearly $290 million in cash and equivalents, low debt levels, positive cash flow, our new credit facility, completed at a time when the interest rates were far more reasonable than today, we're in a very strong financial position to implement our strategic plan and to seize new business opportunities.

As stated earlier, our customers continue to have busy practices, albeit with slightly less backlog than perhaps a year ago, and which may in fact impact certain elective procedures.

We believe that with an expanding number of products and value-added services, which are geared towards helping practitioners operate a better small business and provide better clinical care during these challenging times, we believe that we are able to offer great services that are needed at this time by our customers, and remain very optimistic about the future of Henry Schein.

We believe that the decision we made to reduce head count by 300 team Schein members is appropriate and in conformity with our needs as a company to invest more funding in the business to grow the business, and at the same time deliver on our consensus estimates as Steven provided earlier on and so help to increase shareholder value.

So with that overview, I thank you for your attention this morning, and now operator we are ready to take questions.

Thank you.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Glen Santangelo.

Yes, Stan, just a quick question on the equipment business.

I'm curious to get your opinion on what you think that the dentist is reacting to.

I mean clearly you suggested he's seen a little bit of a slowdown in his backlog.

Do you think that's what he's nervous about?

It doesn't sound like it's a credit issue.

Or do you think it's really just a loss of his own personal wealth that maybe is making him a little bit more cautious in terms of buying new equipment?

Yes, Glen, I think we noticed the postponement of installation right about the time when the market took the slide in the middle of September.

The decision I think to postpone purchase of particularly the high-end equipment is related to, in our view, the net worth and the shock of receiving financial statements from brokers towards the end of -- towards early October, but in anticipation of those statements, the concern emerged in the middle of September.

We are now in the process of explaining to our customers the value of using this new equipment, specifically the high-tech equipment in helping the practitioner operate a more efficient practice so that they can focus on increased productivity, reducing expenses in managing the practice, and of course providing better clinical care.

But we think that the concern relates to the financial condition of the practitioner rather than a rapid slowdown in patient flow.

Although as we've said for a long time, the more elective procedures, whether it's in the orthodontic or implant area or perhaps in the expansive laboratory area, all I think contributed to a marginal slowing in the consumable demand, demand for consumable products.

Stan, if I could maybe just ask one follow-up question to that, so if the weakness is on the high end, it kind of sounds like it's maybe in 3D cone beam and maybe the soft tissue laser.

One of the big growth categories for you has been digital x-ray.

I mean are you still seeing some growth there?

Do you still believe you're taking market share?

And I guess based on your 2009 outlook, you're kind of assuming that, you know, this current environment persists, you know, for at least a couple, few quarters, and is that the primary catalyst for maybe a slightly lower than normal outlook as it relates to 2009?

Glen, the question you're asking is one that I personally, together with our senior management, spent a lot of time reviewing with our suppliers, specifically at the ADA meeting, and we believe that we continue on balance to gain market share on the consumable side and the equipment side.

I think it's only prudent for us to be a little bit more cautionary because we have all intentions and desires and a big drive to deliver on the results that Steven has articulated in the guidance.

These numbers do contemplate a stronger dollar, which at the margin doesn't impact earnings a lot, but with a steep rise in the dollar, there is some impact on the bottom line.

We've got to take that into account.

I think we've got to take into account for 2009 that we will sell proportionately less flu vaccine.

And so I think on balance, taking all of this into account and really not knowing where the economy is going to be heading, and whether there will be even a moderate recovery in the financial statements from a market share -- equity of view of our customers, I think it is prudent for us to be taking a little bit more caution.

I believe on the digital x-ray side, we will continue to grow.

How fast we grow is very hard to tell.

We see good demand for D4D, but as you correctly point out, on the more expensive items there is a challenge.

One should also recognize, I know we're getting perhaps a little too micro, that on the 3D side, there are now medium field-of-view products available at a much lower price.

That is also taking some market share from the more expensive units, and we have actually seen a movement from more expensive dental units, chairs, units, lights, to the lower-priced units.

You know, all of these are small, but I think it is absolutely appropriate for us to be a little bit more cautionary, and at the same time for us to continue to invest in our business because we see great, great opportunity in the medical, dental and international arena to increase our footprint and over time increase our overall profitability and shareholder value.

We remain very optimistic about Henry Schein and our opportunities.

Okay, very good.

Thanks.

Your next question comes from the line of Lisa Gill.

Thanks very much, and good morning.

I just had a couple of follow-up questions as it pertains to the guidance and looking to next year.

First, when we think about foreign currency, I think that, Stan, you said there wouldn't be an enormous impact, but obviously I think it helps you in 2008.

Maybe you could just talk about the headwinds and the differences between the two years, being the first thing.

And then secondly, on the positive side, you had talked about the private label products being up 20% and obviously the margins being better in that portion of your business.

Can you talk about what your expectations are for private label and potentially -where you think it could potentially go?

And then just lastly, I think that when you gave, Steven, the guidance for next year, you usually give us some indication as to what your expectations are around margin improvement.

Did miss that, or did you just not give it this year?

Thanks.

Lisa, let me respond to the private label side.

The private label drive is particularly strong in the medical arena.

Position reimbursement per procedures are going down, and in many instances the practitioners are expecting it to go down, in light of the expectations on reimbursement from Washington.

Having said that, the number of procedures clearly is going up in the outpatient physician [after] - setting.

So the physicians who see the use of private brand in the hospital setting are very comfortable using private brand, so the marked movement towards private brand I think is to be expected on the medical side.

Likewise, in Europe, we have seen in certain countries a rapid movement towards private brand.

On the dental side here, I don't think it's as common for the technique-sensitive items and there will be -- there will not be a major shift.

We also do not sell private brand equipment in general, certainly not in the US, maybe in one or two smaller businesses in Europe.

So I think I would like to qualify my earlier statement.

I do believe there will be a continual movement towards private brand on the medical side and in specific markets in Europe and a slight movement on the dental side in the United States, and not in the equipment arena.

As far as foreign exchange is concerned and margins, let me ask Steven to respond to that.

Okay, on foreign exchange, we did have some benefit this year.

The benefit in Q3 was really insignificant, but on the year-to-date basis it probably is somewhere plus or minus $0.01 per quarter on a year-to-date basis, so it did have a favorable impact.

We're not expecting a favorable impact going forward into 2009.

Again, we really try to manage the business.

We don't hedge that translation adjustment because it's not an economic exposure, it's only an accounting exposure, so we do expect the dollar to continue to strengthen a bit from where it is today, and that's factored into our guidance.

With respect to margins, yes, we did not give specific margin guidance on the call just now, but I would say that we do expect to get operating margin expansion.

We do expect to be on the high end of our long-term goals, specifically because we have introduced this expense reduction initiative that will have benefits in 2009, and we are expecting sales growth to moderate a bit.

So obviously in order to achieve our guidance, we do expect to get strong margin expansion in 2009.

Great.

Thank you very much.

Okay.

Your next question comes from the line of Randall Stanicky.

Great.

Thanks for the questions.

Just two follow-up questions around the guidance.

One, can you just help us understand how we should think about the annualized cost savings of the restructuring $24 million to $27 million to roll on, and then second, as we look at the minority line, looks like CAMLOG was down, and we talked last quarter about that being flattish.

So can you maybe talk about what you've built in in terms of expectations around that?

Thanks.

The second part about being flattish, I didn't hear.

In terms of your minority line in CAMLOG, just how do we think about that line item going forward?

Okay.

Okay.

First on the expense reductions, while it won't be perfectly even throughout the year, it will be a little bit more, you know, increasing over the year.

It will be, you know, relatively, you know, throughout the entire year for 2009 because we do expect the activities to be - to be completed by the year end.

That's why we're expecting the charge to occur all in the fourth quarter, and therefore we do expect it to be relatively even throughout the year.

With respect to minority interest, the growth in the minority interest, even though it's an expense item, it's a good growth because that means that the controlling interest that we have primarily in two businesses, the CAMLOG business and the -- our Australian business, where we own over 50% of both of those business units, has been growing very nicely and because of that growth, the minority interest in that net income should continue to grow as the underlying business profitability grows.

But in terms of it being off a little bit, should we think about this quarter as being the appropriate run rate going forward?

You know, this quarter, again, because CAMLOG has a significant amount of their business in Germany and because, I think as you realize, the summer months are the slowest months for our international operations, I don't think this is the typical run rate.

I think you're going to see it increase a bit in Q4 as well as again as the business grows, it should increase proportionate to the growth in the business profits.

And then just to be clear, on the expense run rate, what quarter should we think about as being sort of the peak savings in terms of annualizing that number going forward?

You know, I don't know if I have a specific on the peak.

You know, again, it will be relatively even throughout the year.

Sounds like you get there fairly quickly, then, if the cost savings are done in short order going forward.

Like Q1, Q2, looks like we've sort of realized most of those cost savings, is that fair?

I think that's a fairway of looking at it, yes.

Okay.

That's helpful.

Thanks, guys.

Okay.

Your next question comes from the line of Robert Willoughby.

What, if any, impact are you seeing from your competitor's free dental software program?

And secondarily, you did redo the Glaxo relationship.

Where do we see or will we see the impacts on your financial statements from doing that?

Especially on the competitive marketplace, we really don't see much of an impact, On the software side, there has been a gradual movement from the sale of dental software to electronic claims processing and other electronic services.

This movement began about three or four years ago and will continue, we think, for a while, or not actually for -- permanently.

So providing free software is something that we also provide, but I don't think in the end of the day that's what drives the sale.

There's much more to driving equipment sales and consumable sales than free software, and that's not something we are responding to in any particular way.

We've had this kind of a plan in place for a while, in any event.

Steven?

Yes, I'll talk about the Glaxo amendment.

Really we don't expect it to have any significant impact on our financial results.

Basically the amendment did two things.

First, it shortened the duration of the contract.

It is now a five-year contract.

It was a contract for a longer period of time, but it's a five-year committed contract with this amendment.

And the second thing is it really aligned our purchase commitment to what Glaxo's production expectations are currently.

So before this amendment, our purchase commitments allowed for incremental purchase commitments based on their production expectations, but given now their new production expectations, there's really an alignment with that.

It's in effect for 2008.

So, again, from a financial perspective, it was really kind of cleaning up the contract and really should not -- you should not see or expect to see any noticeable results in our financial results this year or in future years.

So no charge or intangible whatsoever on that?

That's correct.

And just lastly, where do the cuts come?

You're shutting some facilities, letting 300 people go.

What areas will be they across the company, or any targeted areas?

I think you will it see across the company, both domestically and internationally.

Whereas it is a very difficult decision to let any team Schein member go, the 2.5% impact in any particular business is not material.

It's across the board in all our businesses.

That's great.

Thank you.

Your next question comes from the line of Derek Leckow.

Steven, just a question here on the operating margin and the savings that you talked about.

If I leave the model alone and plug in the numbers you gave, I get about a 30 to 40 basis point contraction in operating margin before the savings, and then with the savings, I guess the question becomes are you also anticipating some contraction in the gross margin next year?

You know, again, we are getting into really specific items that we typically don't get into, but we're really not expecting any significant changes in our gross margin going forward.

You know, again, I will out that as we've seen in Q3, the bulk of our business really has very little impact on economic changes, namely the consumable part of the business.

But we do expect slower growth in the equipment side and, as you know, equipment does have very good margins, especially incremental equipment sales.

You should factor that into your modeling also.

That's what I was getting at, the mix issue for next year.

Also you guys used a lower assumption for influenza vaccine.

Why is that, and what impact would that have also on the margin?

If you look at our guidance, we try to do this.

There's a lot of uncertainty in the economy.

There's some uncertainty in our business, and we really try to be conservative in the guidance that we're giving.

You know, we want to make sure that we'll achieve our guidance, and hopefully that there's opportunities for acquisitions and other things to, you know, to even do better.

So when you look across the board on the EPS growth, you know, again, we try to be conservative.

The same thing with flu vaccine.

You know, we want to be conservative in our expectations for what we're going to sell in 2009, so therefore we're a little bit lower than where we expect it to come in this year.

And, again, it's just generally that we feel that it's important to put out guidance, given all the uncertainty in the market, that we feel comfortable that we can achieve, that we have high confidence that we can achieve and, you know, during the year, there's something that's positive.

There's always opportunities to update guidance during the year.

Just to follow on a little bit on what Steven said, our goal over the last several years has been to reduce the percentage of profits from the flu arena, and we have been executing in accordance with that plan.

We are focused on selling flu vaccine to our customers, the general customers for medical products, which tend to be the small practitioners, and it is in that context that we are focused on the practitioner versus some of the larger customers in the flu area such as these clinics, the providers are flu - pharmacies, et cetera, nursing home providers.

That's interesting business, but in line with our concept of reducing the volume of low-margin pharmaceuticals, we would like to remain focused on the specific customers that we sell general products to, the smaller practitioners, who appreciate the service from Henry Schein and are therefore prepared to pay a little bit more.

And accordingly, we find that a better business to go after and therefore are reducing our expectations for the sale of flu vaccine.

So it sounds like despite the fact that you're expecting lower volumes on equipment, the margins should be fairly stable, the gross margin?

Yes, I think that's right.

Well, I think we also, as Steven mentioned earlier on, on the overall operating margin continued to move the business towards our strategic goal, which is to increase margins by 25 to 50 basis points, and that is our overall goal, and our budget for 2009 contemplates that goal continuing.

Okay, thank you.

Good luck.

Your next question comes from the line of Larry Marsh.

Hi, good morning, Stanley and Steve.

Just a couple of follow-ups.

Could the -- you may have already said this, but I know coming into this quarter, you talked about flu earnings contribution for '08 being $0.13 to $0.16 per share.

Is that -- you know, are you at the higher end of that, given your volume is a little bit higher?

And how do we even think about, conceptually, the flu contribution for '09?

Well, you know, for 2008, you know, we're still within the range.

We're not going to be very specific, but we still expect to be in the range of the $0.13 to $0.16 cents.

It will probably be slightly lower in 2009, again, because right now our expectations are we will sell a little bit less doses than we're selling in 2008.

Right.

So it will be slightly less.

Okay.

And then just to make sure we got this right, the -- you know, when you sort of think about all of your assumptions for '09, you know, given the accounting translation on your foreign business, what is your general level of expectations of the exchange rate between the Euro and the dollar as you, you know, as you budget?

Well, you know, right now we're contemplating that the dollar will stay the same or strengthen slightly.

You know, there was a big move just a couple of weeks or so ago, where the dollar strengthened significantly.

And obviously, Larry, I want to caution you.

We're not experts in forecasting the way the dollar goes, but again, there's been some headwind benefit in 2008 - sorry, there is some tailwind benefit, and we think there will be some headwind in 2009 because of foreign exchange.

Right, so just to be clear, if the dollar/Euro exchange rates, let's just call it $1.25 to $1.30, you're saying that you're thinking is the dollar could strengthen a little bit in '09, knowing that you're not an expert in anticipating that, and if it does and that would, again, constitute an incremental headwind of maybe a couple of cents or, you know, more versus '08?

That's right.

That's exactly right.

Okay.

Again, we will carve out -- if the dollar does move dramatically in any way, we'll talk about that and be very transparent in our future conference calls because it's not something that we can obviously control.

Okay.

The dollar weakened over a long period of time, and a rapid increase in the dollar obviously is of concern.

If it strengthens in a moderate way, that's one thing, but when we have these rapid changes, I think we need to take those into account.

Right, as you're doing in your expectations.

And I think at this time maybe we're a little cautious, but no one knows where this is going to go.

No, it's certainly prudent.

Just on the -- Steven, how are you thinking about your allowance for doubtful accounts?

As you think about the economy being more challenging, obviously you've done a good job of bringing that down as a percentage of the gross receivables.

Is another factor in your expectations that you might have that creep up a little bit more in '09, or no?

Well, we're monitoring our accounts receivable very closely.

The good news is we're really not seeing in any parts of our business any lengthening, of people taking longer to pay.

In fact, you saw even in Q3 our DSOs improved slightly versus last year.

So right now customers continue to pay very well, so - our customer base, again, from a credit risk point of view, is probably one of the best - you know, the best customer groups in any industry.

So we're really not expecting bad debt exposure to creep up at all, but we will monitor it very closely and we'll make sure that, you know, customers continue to pay timely.

Just a second question, again, around the market.

Seems like one of the topics at ADA was credit availability.

I'm kind of curious, from where you sit do you feel like that market's been disrupted a bit, especially given GE being out of it completely for a while?

And is that also factoring in your expectations for '09, and are you -- have you ever given us a sort of sense of how much of that total equipment leasing business you're now originating through Henry Schein Financial Services?

Larry, as we mentioned in the call, we actually are very pleased with our access to funds, although you're correct, GE and even CitiBank as a result of its sale of the business that you're referring to, to GE, caused major disruption, but from our customers' point of view, we did not miss a beat and feel very confident that the credit lines that we have available for the fourth quarter and into 2009 are very good.

We have competitive offerings through Henry Schein Financial Services and Steven and the team at Henry Schein Financial Services I think have done an outstanding job, which puts us in a competitive advantage.

As to the profitability of Schein Financial Services, I'll let Steven answer that.

Yes, let me just -- before I go to the profitability, I think it's important to note that in the dental as well as the physician space, the fact that GE is pretty much not doing much financing at all today will have a negative impact generally in financing our market.

That will not impact us.

We have access to three different sources of finance, and I won't name them just for competitive reasons.

We're doing more financing today than we've ever done.

As Stanley said in his prepared remarks, the third quarter was up about 30% in the number of transactions that we're financing.

So Henry Schein I think does have a competitive advantage in being able to access financing for our customers.

Again, let me just also repeat, we have no credit risk to us on those financing transactions.

We get paid immediately from the financing sources.

We do get paid, you know, effectively a sales commission or points for every transaction that we bring, and it is a private brand financing for our customers.

So I think we're in a very good position.

That is -- it's a small business, Financial Services, for us, but it is very profitable, has very high operating margins, and, you know, our goal is to continue to grow it, but again not to take the credit risk because, you know, we really don't want to be a bank or a financing institution.

Right.

So in terms of total amount of business that is being leased, what percentage is coming through your sort of brand?

Have you ever given us that sort of idea?

No, but I can tell you that Henry Schein Financial Services, which has more than one private brand, is probably financing -- I'll use US dental equipment because I know that number, probably as much as 30%, or 35% of all the equipment that we're selling.

It's a very high percentage of what we sell, we finance, with our own private brand.

Now, there are some customers that may use financing outside of Henry Schein.

They may go to a bank credit line or home equity line or some other sources, but I think if you compare private label financing, you know, 30% is very solid penetration.

Uh-huh, okay.

One other quick thing, sounds like then Stanley you're saying that, you know, despite [Eagle Soft] being given away, you're really not seeing that as a surprise.

It's not really changing the profitability or technology business, so are you communicating that you don't really see that as being economically sensitive, the way some of this equipment is being impacted?

Well, Larry, I think -- we've reported this through our calls I think over the years.

The movement in revenue on the US dental software business is one of migrating, and has been one of migrating, to electronic services.

In fact, providing software free or at no charge or at a minimal charge may in certain instances be very profitable because of the ongoing recurring revenue.

I don't want to get into details because of competitive - our competitive situation, and the way in which we market our software.

But -- I'm talking about the US dental business.

The European business, Software of Excellence is a different model because there is a different kind of synergy between digital x-ray and software.

It's a different model.

But in the US, the changes you referred to are not really impacting our business.

It's the quality of the system, the overall service that's important, that is received from our field consultants that's important, and then what is ultimately important in this whole equation is how much recurring revenue we can make from the customer.

All of that's taken into account, and has been taken into account for a long time now, in the overall relationship with the customer.

We believe we continue to gain the market share on the digital side and are very, very pleased with our [Dexles] relationship, plus some of the other products that we offer in that arena.

Very good.

And finally, I'm assuming you're communicating today you'd still look to be opportunistic in making acquisitions, given your steady cash flows, both domestically and internationally, or are you saying you might want to be a little bit more conservative in allocation of cash here in the next year?

Well, I think -- I would hope we've always been conservative in the way in which we've managed our M&A program.

More conservative, yes.

Our pipeline is as full as ever.

We of course are very cautious, as we always have been, on businesses we buy, and businesses we buy are generally always businesses that tie into the office- based practitioner environment, either tuck-in acquisitions or geographic expansion or product expansions for that group of -- for our group of customers.

So I think you can expect us, without making any commitments obviously because we cannot make commitments until a deal is signed, to continue to make acquisitions at the level that we've made over the past few years, although I think it is fair to say that the prices of acquisitions has come down a little bit because the smaller competitors are having a problem accessing capital.

We are very pleased with our current cash balance, marketable securities balance on our balance sheet, and also the line of credit that Steven was able to agree to with our banks about six weeks ago.

Very good, thank you.

Your next question comes from the line of John Kreger.

Hi, thanks.

Two quick questions.

One, could you give us an update on how [E4D] is performing, now that you've gone from a controlled launch to a broader launch?

And also, Stanley, could you perhaps expand a bit more on how you're seeing your European business perform?

Certainly there's a lot of evidence that those economies are slowing, but we also have the perception that since that's more of a government-reimbursed service, just curious if you're seeing slowing in those end markets within the EU?

Yes.

On D4D, we remain very optimistic on the product.

I think -- I still think it's somewhat of a controlled launch.

We are filling classes very nicely.

We're not dramatically increasing the capacity of classes.

The systems we're selling are sticking very nicely.

We're having no problem financing these acquisitions.

We're seeing a steady growth in consumable sales in that area.

And we believe that D4D will continue to contribute in terms of sales growth of equipment over the next year or so, and perhaps cushion some of the decrease in sales of the very, very high-tech - very, very expensive, high-tech equipment.

And we can justify to our customers that they can save money by installing a D4D product.

We're very happy with the quality of the product.

I think the studies that have been done by some of the universities, although not public yet, are showing very, very good promise, and we think the product overall is as competitive on all the major features as any other product, but actually better on many of the other -- many of the features as well.

As far as Europe is concerned, the economy is obviously impacting the financial statements, the savings of our practitioner customers, but we did have a very good quarter in the third quarter.

We obviously can't give specific guidance on the fourth quarter, other than we think that we will continue to gain market share and we think the consumable market share in general is not going backwards, maybe growing slightly.

On the equipment side is the usual fourth quarter, the year before the FDI meeting, that we have to take into account.

I think you're aware that every two years in either March or April, there is a significant dental show in Germany, in Cologne, where new equipment is shown and very good deals are offered to the practitioners.

And in that context, every two years the fourth quarter every year tends to not be as good as the previous quarter, given that practitioners are waiting for the new products that will be launched and also awaiting to see what kind of deals are offered at these shows - at the IDS show in Cologne.

So overall, I think the European business from a market share of view continues to grow.

The profitability of - our expected profitability of our international business is taken into account in Steven's guidance, and we remain very optimistic about our opportunities in Europe and Australia and New Zealand.

Thanks very much, Stanley.

We do have time to take one more question and it comes from the line of David [Thiel].

Just a couple of follow-up questions.

Steven, if I'm doing the math right, the fourth quarter numbers look like $0.88 to $0.90.

Is that the right range?

Yes, I think that's correct.

Okay, and could you also walk us through what you're thinking for the debt side of the equation, the convert and also the senior notes that are due next year?

Sure.

Let me just out, because you mentioned Q4.

Remember, because of flu vaccine being available earlier this year than in last year, you do have some timing that was accelerated in Q3 this year over Q4, so just keep that in mind when looking at Q4 in isolation.

Sure.

Okay.

With respect to what's going on with our convertible bond, as you may know there is a change in the accounting that is required starting January 1st for the convert.

That is factored into our guidance, because obviously it's something we are aware of, we know about, and the change is, you know, is already down.

So we will have about a $0.03 or $0.04 additional expense impact, and is built into our 2009 guidance.

With respect to maturities that are coming due, you know, at this point we have ample availability through free cash flow, as well as our credit line really, just to repay some of those senior notes as they come due, and that would be the plan at this point.

So you wouldn't anticipate taking on some new debts to replace that, then?

You know, I don't think we need to.

We'll see at that time what the debt markets look like because, you know, obviously we do have very attractive terms in our existing credit facility, but there's no need really that we're in a position where we have to refinance, that we could just refinance it with the revolving credit facility.

But I guess conversely, if you saw a deal like (inaudible) come down the pike, you wouldn't be opposed to taking on some debt to get that done?

That's correct.

Okay.

Hopefully, as Stanley said, I think acquisition opportunities, because we have a strong balance sheet, and we had $280 million of cash on the balance sheet at the end of the third quarter in addition to the $400 million credit line, you know, I'm hopeful that we're going to see attractive opportunities and acquisitions because valuations, you know, from a year or two ago certainly should be down from where they historically have been.

Great.

I appreciate the question.

Okay.

And we now have reached the allotted time for the Q&A portion.

Are there any closing remarks?

Thank you very much, everyone, for participating in the call.

I'm sorry it went on 10 minutes longer than we usually allot, but I think there were just a lot of questions and we wanted to give everyone a chance to ask at least one question.

As I think you have heard from both Steven and myself, although we are somewhat cautious about the macroeconomic trends, we feel that the business is of course in good shape, as I mentioned several times and as Steven mentioned several times.

Our customers are busy.

Perhaps there are parts of their practices are not as busy as in the past.

The business generally is in good shape.

We are not immune from the economic environment.

We have very good plans in place to manage our growth in sales and gross profits, gross profits both internal and through acquisitions, and therefore to increase our operating margin ,and we believe we can turn all of this into consistent earnings per share growth, as Steven has mentioned, and in turn, turn the EPS into cash flow.

Together with our good balance sheet and the cautionary changes we have made in our team to reduce our expense exposure, I think we will do very well during these turbulent times, and continue to deliver shareholder value as we have in the past.

So thank you, again, for joining us.

If you have any questions, please feel free to call Steven Paladino, our Chief Financial Officer, at 631-843-5500, and I believe his direct extension is 5915.

Thank you very much for participating in this call, and we will be back again in a little over three months.

Is it three months or is it -- a little longer because of the fourth quarter, so about 120 days, so thank you very much.

This does conclude today's conference call.

You may now disconnect.